Five for Friday

Whereto From Here, Almost Bears, Outperformers, Gas, Selloffs

1. Selloff

Since Baird’s Market Strategy Weekly video is off this week, I thought it would be worthwhile to highlight last week’s video, in which Technical Strategist Todd Sohn describes the framework he’s using to handicap where the market heads from here: the “bang” and “whimper” pattern of selloffs. The “bang” is the high-drama, fast-paced drawdown, while the “whimper” is a retest of the initial low with less drama and better market internals that comes typically 1 to 3 months later. This has been the pattern across several event-driven selloffs over the years –in 1962, 1987, 1998, 2011, etc. The recency of two less common V-shaped bottoms (sharp drop, sharp bounce) in 2018 and 2020 might color how we think about the pace of a rebound. But if we do end up retesting or even undercutting the April 8 market low, know that it is typical.  

2. Bears

Speaking of how selloffs typically play out…there have been six official bear markets (S&P 500 closing down 20% or more) in the last 50 years. Good for one every 8.3 years. However, there have been five additional selloffs of 19% or greater, including -19.9% in 1990 and -19.8% in 2018. Counting these near-bears brings expectations closer to one every 4.5 years, which is much more in line with historical averages. Expectations matter, and this quirk of market history in some ways understates how often someone should expect a bear market (and the news coverage that comes with it). Today, the current selloff sits at -18.9% peak-to-trough, making it potentially the newest member of the near-bear group.  

3. What's worked?

In a time of great economic uncertainty, it can pay dividends to listen to what the market is telling us. Of the 70+ industries we have performance data for, fewer than 10 both outperformed the S&P 500 during the post-Apr. 2 market selloff AND outperformed during the post-Apr. 8 rebound. Double outperformers include Aerospace & Defense, Software, Media & Entertainment, and Commercial Services & Supplies. Just looking at companies and sectors that are less exposed to global trade might cause you to miss the upside if tariffs are pared back markedly. But looking at both periods shows industries and companies that provided downside protection in the tariff-selloff and upside capture from the 90-day pause. Granted, it’s an extremely short time period, but still a useful exercise to gauge the wisdom of the crowd in an uncertain time.

4. Gas

An important but perhaps underdiscussed item is the extent to which the US has become a liquid natural gas (LNG) powerhouse. North America’s LNG export capacity is on track to more than double between 2024 and 2028, with the U.S. the primary driver. What’s more, U.S. total annual energy production has exceeded total annual energy consumption since 2019 (with natural gas the fastest-growing segment of energy consumption in recent decades). Growth in U.S. natural gas consumption has largely been driven by increased use of natural gas in the electric power sector, which has consumed more natural gas than any other sector for each of the past five years. The U.S. can’t make everything it needs to be the world’s dominant power, but having a leadership position in energy production is a massive advantage in a power-hungry world.

5. Drawdowns

Per Fidelity’s Jurien Timmer, since 1927, the S&P 500 has spent 37% of its time in a 10% correction and 20% of its time in a bear market. While stocks have delivered incredible returns for investors over the last century, its an important reminder that much of the day-to-day is spent in selloffs of various sizes, making it all the more important to be invested whenever the big rallies to new all-time highs do occur – especially when they come at unexpected times.  

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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