This is the fifth major correction since the 2022 low. Interestingly, the nature of the current correction in US stocks is very mean-reverting. What was previously growing more strongly is now falling more strongly - which is best seen in Mag7 companies, which have fallen by about 11.7% since their recent peak. See Figure 1.
In the case of the Nasdaq100, the current maximum drawdown was 8.9%, for the S&P500 it was 4.7%. Mean-reversion also affects small companies, and the Russell 2000 is trying to make up for lost time and performance with respect to other major indexes.
During the correction in April 2024, the maximum drawdowns were for: Mag7 -6.5%; Nasdaq100 -7.1%; S&P500 -5.5%.
If we look at all five S&P500 corrections since the October 2022 low, their range was from -5.5% to -10.3%. See Figure 2.
The current correction is quite similar. In the base-case scenario, it is a correction similar to the previous ones, below are the main arguments.
First of all, we are just ahead of interest rate cuts by the FED, which should have a positive impact on stocks, in particular long-duration stocks such as technology companies (ceteris paribus). The closest analogy is 2019, when the cycle of interest rate cuts began. In 2019, we had two corrections in the S&P500 (-6.8% and -6.1%). The FED cut rates three times in a row (which gave hope for a soft landing). From the bottom of the second correction, the S&P500 increased by more than 19% until the end of the bull market in February 2020. See Figure 3. The S&PP500 closed the entire year 2019 with a result of +28.9%. Meanwhile, the Nasdaq100 closed 2019 with a result of +38.0%.
Second, it's an election year, and historically, stocks can perform better in such years.
Thirdly, we are still facing interest rate cuts, which means a still strong economy and higher corporate profits. Paradoxically, the longer the Fed does not lower rates, the longer the expansion and bull market may last.
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