When will the market bounce: History says a bigger drawdown ahead

The S&P/ASX 200 has fared the emerging bear market far better than its Wall St peers, down -7.8% year-to-date.

By comparison: 

• Dow Jones -11.9%

• S&P 500 -16.8%

• Nasdaq Composite -26.6%

The S&P 500 has been red for 5 consecutive weeks, staging its largest decline since the covid-induced selloff in March 2020 and longest correction since 2016.

The prolonged selloff might have many dip buyers and knife catchers eagerly waiting for a bounce. Though, history might show cracks to that logic. 

Data complied by Steve Deppe from Nerad & Deppe Wealth Management observes the historic forward returns for the S&P 500 after a 5 week losing streak.

 Source: Steve Deppe (@sjd10304)

The table can be quite a lot to digest, in simple terms:

• The table measures S&P 500 performance 1, 2, 3, 4, 6 and 12 weeks after a 5 week drawdown

• Across the 6 time frames:

  • S&P 500 returns tend to be negative

  • Average performance is -0.35% (avg of all 6 timeframes)

  • The S&P 500 is up 39.5% of the time (avg of all 6 timeframes)

  • The average drawdown within 12 weeks was -6.01%

  • The maximum drawdown within 12 weeks was -25%

Attractive but risky

The two most asked client questions by Bank of America clients were:

• How close are we to the bottom?

• Is Wednesday's CPI a positive catalyst?

Bank of America said that buying at these levels "makes some sense but it is tough to think one should be putting on material risk ahead of the CPI print".

Worsening liquidity

The Fed has warned of worsening market liquidity in its May Financial Stability Report.

"Market liquidity—the ease of buying and selling desired quantities of an asset—is an important indicator of how well markets are functioning . According to some measures, market liquidity has declined since late 2021 in the markets for recently issued U .S . cash Treasury securities and for equity index futures."

"Low liquidity in these markets can amplify price volatility and result in unexpected tightening in financial conditions."

"While the recent deterioration in liquidity has not been as extreme as in some past episodes, the risk of a sudden significant deterioration appears higher than normal."