The stock market’s dreadful performance this quarter has brought uncomfortable parallels with some of the darkest periods in Wall Street history.
The S&P 500’s plunge on Tuesday left the broad index staring at a 9.1% deficit on the quarter. That marks the S&P 500’s worst start to a fourth quarter through 37 trading days since 2008, according to Bespoke Investment Group.
Thankfully, the current slump is nowhere near as serious as the 35% meltdown from a decade ago. That was during the worst financial crisis in nearly a century. Lehman Brothers had just imploded, AIG (AIG) required a massive rescue and unemployment was skyrocketing.
The bad news is that the S&P 500 has only started the fourth quarter this horribly five other times in history, according to Bespoke. And those years are all infamous. Besides 2008, these years include the Great Depression (1929, 1932 and 1937) as well as 1987 during the Black Monday crash.
And the 7th worst start to the fourth quarter occurred during the oil embargo and bear market of 1973.
In other words, the bull market is in less-than-ideal company. All of those years coincided with recessions, other than 1987.
That doesn’t mean the market is going to keep plunging. The American economy is much stronger today and corporate profits have never been higher. Few fear an imminent recession, though they are bracing for a slowdown.
The Dow climbed more than 200 points on Wednesday morning, but the rally vanished by the closing bell. The Nasdaq advanced nearly 1%.
Analysts said the earlier bounce makes sense given how oversold the market appeared.
“We are set up for a short-term bounce,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote to clients. But he said the rebound would be fleeting as investors refocus on the upcoming meeting in Argentina between President Donald Trump and Chinese President Xi Jinping.
Worries about the US-China trade war have contributed to investor fears about slowing economic and earnings growth. Wall Street is increasingly betting that the boom may be over. Some even argue the stock market is already in a bear market, though it’s not officially there yet.
Kit Juckes, strategist at Societe Generale, doesn’t think the rebound will last.
“Today’s one of those days when the rollercoaster takes us slowly back up, before the next (inevitable) lurch down,” Juckes wrote to clients on Wednesday.
The silver lining to the market’s terrible fourth quarter is that history shows the end of the year can still be lucrative.
When the S&P 500 declines by at least 2% through the first 37 trading days of the fourth quarter, it has averaged a gain of 2.8% through the remainder of the year, according to Bespoke. And it’s been positive 78% of the time.
But the outlook isn’t as rosy for years similar to this one. During the four years the S&P 500 lost between 8% and 12% at this stage of the fourth quarter, it declined each time, Bespoke said.