A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

November 3, 2014

US equities: putting the pullback in perspective
5 largest price declines in past 5 years for S&P 500 & Russell 2000

chart

Source: Bloomberg, as of 10/28/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The sudden swoon in stock prices in early October was unsettling, but most investors took it in stride.
  • In hindsight, that was appropriate; the S&P 500's pullback ended up falling short of the 10% level that defines a correction—and was the smallest of any of the previous five major pullbacks, based on the closing value of the index.
  • In small caps, on the other hand, correction in small-cap stocks was the largest since 2011 with volatility in the Russell 2000 also exceeding its long-term average as well.¹
  • Of course, since their recent bottoms both indexes have rebounded smartly—the Russell 2000 up 9.5% and the S&P 500 up 6.6%—a reminder that upturns can occur as swiftly and powerfully as downturns.
  • In general, a higher level of volatility overall, with greater swings in small-cap equities, is the normal course of things.
  • But corrections and heightened volatility often signal the start of a change in leadership—and chances for active managers to make shifts that capture value amid that change.

The chart:

  • The chart shows the five largest pullbacks (based on the closing values) in the price of the S&P500 Index and the Russell 2000 Index in the past five years.
  • In 2010, both indexes peaked on April 23rd; the S&P 500 bottomed on July 2nd and the Russell 2000 on July 6th.
  • In 2011, both indexes peaked on April 29th and bottomed on October 3rd.
  • In 2012, there were two pullbacks in excess of 7%. During the first, the Russell 2000 peaked on March 26th and the S&P 500 on April 2nd; the S&P 500 then bottomed on June 1st and the Russell 2000 on June 4th. The second began on September 14th and ended on November 15th for both indexes.
  • During 2014, the S&P 500 fell 7.4% from its September 18th record high to the recent bottom on October 15th—that decline was below the 10% rule of thumb threshold for an official correction.
  • Meanwhile, the Russell 2000 fell 13.2% between March 4, 2014 (the date of its most recent closing high) and October 13th—the date of its most recent bottom.
  • It should be noted that the Russell rallied back almost recovering its record high by July 3rd before trending lower again—the decline from that point through October 13th was also around 13.2%.
  • Either way, it represents the biggest pullback since a 29.6% decline in 2011.

 

¹ From the March 4th record close through October 13th the Russell 2000 swung 1% or more (opening/closing values) on 48 days, or 31.2% of the time. That frequency exceeded the 26% long-term average of daily swings for the index. Over that same time period the S&P 500 experienced daily price changes of 1% or more about 12% of the time, although the large-cap index has been nearly as volatile in October as the small-cap index, based on 1% daily moves. Since their recent bottoms, both indexes have continued to exhibit volatility, but the moves have been mostly to the upside. Since its recent bottom (through 10/28), the Russell has moved 1% or more during 8 of 11 trading days (7 of those up) compared with 4 of 9 trading days (all up) for the S&P 500.


Definitions:

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

The Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small and/or midsize companies.


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