Observers also argued that recessions since 1948 were were preceded by a 10% or more decline in the S&P 500, which is worrisome since we just saw a 14.2% drop earlier this year. However, the market tends to be overly cautious and anticipated 32 of the last 11 recessions – for investors, this means that not all corrections and bear markets lead to recessions.
[related_stories]Heightened valuations has also been a point of concern for many equity traders. However, valuations need to be considered in relation to inflation. Given the core CPI rose 2.2% since March of 2015, today’s General Accepted Accounting Principles price-to-earnings of 20.4X is currently 8% below the average during prior low levels of inflation since 1958. Stovall also pointed out that the S&P 500 typically returned an average 6.5% in the following months whenever inflation was this low.
Federal Reserve interest rate normalization has also weighted on the equity outlook. However, S&P 500 dividend yields of 2.2% remain well above 1.77% yield on benchmark 10-year Treasuries. Since 1953, the S&P 500 has expanded an average 19% in the following 12-month period when the dividend yield of the benchmark index was above 10-year Treasury yields, posting a positive return 80% of the time.
Market traders are also growing cautious ahead of the seasonal “sell in May” mindset. Stovall, though, warned investors against trying to time the market. Alternatively, the strategist suggested investors may consider “rotating rather than retreating” during this typically challenging period.