If History Is A Guide, Large-Cap ETFs Have Further To Fall

Monday was a brutal day for the S&P 500 and the related exchange traded funds, such as the SPDR S&P 500 ETF SPY.

For the second consecutive day, every sector, market capitalization segment (large, mid and small) and investment factor (growth, value, etc.), declined.

What Happened

Tuesday started out better, but when the closing bell rang, SPY was up a meager 0.01 percent. While there's plenty of talk about a bear market being afoot, SPY and rival cap-weighted S&P 500 ETFs are just over 13 percent below their 52-week highs, indicating large caps potentially have room to run to the downside.

“Now every segment of the U.S. equity market is negative in December (month-to-date through Dec. 17, 2018.),” said S&P Dow Jones Indices Managing Director Jodie Gunzberg in a note. “Only 9 times in history has every segment of the U.S. equity market lost in a month (with all sector data starting in 1995 and style data in 1997.)   Those months were Aug. 2015, Sep. 2011, May and Jun. 2010, Jan. and Feb. 2009, Oct. 2008, and Jul. and Sep, 2002.”

Why It's Important

Just two sectors -- health care and utilities -- remain positive on a year-to-date basis. Health care, which accounts for 15.48 percent of SPY's sector weight, is rapidly giving up its year-to-date gains this month. Historical data indicate the S&P 500's recent decline are nowhere close to some of the most treacherous bear markets of years past.

“The last two bear markets lost 56.8% in the global financial crisis and 49.1% in the tech bubble burst,” said Gunzberg. “While this drop since Sep. 20, 2018 may feel painful, the S&P 500 has further to fall before it reaches bear market status of a 20% drop.”

Among market cap segments, only small caps are currently in official bear market territory. The iShares Core S&P Small-Cap ETF IJR, which tracks the S&P SmallCap 600 Index, is 22 percent below its 52-week high.

What's Next

There are no guarantees this will happen, but if stocks snap out of the recent bearish malaise, it's likely to happen to dramatic, rapid fashion.

“However, the returns in the first days of a bull market are historically big on average, so it is important to try not to miss them,” according to Gunzberg. “After just 3 days, the S&P 500 average return was 6.6%, and after 5, 10 and 20 days, the respective returns on average were 7.5%, 10.3% and 11.3%.  Also, in 5 of 13 years (1932, 1970, 1974, 2002 and 2009,) returns of 10% or more were measured after just 5 days.”

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