The pace of the selloff, and the impression that the U.S. economy will slide into a recession some time next year have inspired a gloomy outlook on markets. Few, if any, market bulls have come forward to call a bottom. And there’s plenty of data to warrant caution.
Before the market’s most recent attempt at a post-correction rebound faded on Tuesday, a team of analysts at Jefferies produced a note to clients analyzing forward returns for the S&P 500 a year after periods of historical losses to test the conventional wisdom that selloffs like these often reward courageous dip buyers.
In the note, the analysts examined periods where the S&P 500 had dropped 10%, 15%, 20% and 25% from its previous high. Using market data dating back to the 1950s, the analysts found that, historically speaking, U.S. stocks typically don’t recoup their losses within a year, unless the indexes clear the 25% selloff mark.
Perhaps this is one reason why professional money managers remain so cautious. Bank of America’s most recent Global Fund Managers survey showed that over the past month fund managers have increased their cash position by 5%, reaching the highest level in 20 years in May. Recent surveys have also confirmed the gloomy atmosphere by showing that a gauge of financial market risk is at its highest level since Merril Lynch started the survey, with fund managers expecting slowing economic growth and rising rates to continue to weigh on stocks.
That’s not to say there aren’t some bulls left. A team of JP Morgan analysts recently told clients that up to $250 billion of “rebalancing” flows away from bonds and into equities could trigger another brief rebound in stocks before the end of the second quarter.