Has a long and painful journey to the bottom in equities just begun?

Has a long and painful journey to the bottom in equities just begun?

Equities 8 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  S&P 500 is down 18% and we are 95 trading sessions into the current drawdown. Investors basing their decisions today on the experience of the past 12 years would argue that now is the time to buy equities, but unfortunately the past 12 years are worthless for the decision making today. The two drawdowns of the 1970s and one post the dot-com bubble are more aligned with the current dynamics and based on these three drawdowns investors are in for more pain and for much longer than most expect will happen.


History suggests the current drawdown could be long and brutal

The current drawdown feels brutal with Nasdaq 100 down 28% and S&P 500 down 17% since their respective peaks. We are 95 days into the current drawdown in S&P 500 and a drawdown that is currently the 15th largest since 1928. As we wrote the other day, many strategists and investors are talking more about buying the dip in technology and downplaying inflation, than looking at the hard reality; the world has hit a physical limit with a galloping energy crisis and a global food crisis that is only to get worse.

Many argue that drawdowns are short and that equities will quickly come back, but this type of thinking is misguided as it is mostly driven by the drawdown structure since 2010 which has been an outlier in the greater history of capital markets. The longest drawdown since 2010 was the period 2015-05-22 to 2016-07-11 which took 286 trading sessions. The current drawdown is the 4th largest since 2010 and the average number of days to the trough of the 10% or worse drawdowns since 2010 (there are seven of those) is 76 days, so if we apply the post financial crisis years as our baseline of course investors should buy the dip and the sunset is near. Unfortunately these samples are the wrong ones to apply.

If we look at the 30 largest drawdowns since 1928 in the S&P 500 there is a striking pattern. Either a drawdown reaches its trough fast or it takes a long time. The middle ground seems to be small. The total length of a drawdown, that is the combined length of first going to trough and then a full recovery to the past peak, is a function of the drawdown depth itself but also the length to the trough. Instead of naively applying the same weight on all historic samples some should have a higher weight as they are more relevant for the current regime.

We would argue that the drawdown after the dot-com bubble has similarities to the current drawdown due to above average equity valuation we reached this time in the MSCI World. The two other drawdowns during the early 1970s and late 1970s have similarities to the current inflation shock, supply constraints, and commodity crisis that we observe today. These three drawdowns had trading sessions to trough of 360 to 637 days (1.5 to 2.5 years before reaching the bottom) and a full length of 820 to 1898 days, that is around 3 to 7.5 years. In other words, the painful reality is that we might have just started on a very long journey into the unknown and something that looks very different than our past 12 years of experience.

The VIX forward curve as we have recently described is still relatively flat and is not suggesting panic or capitulation mode in US equities, so the worst is likely to come. The best investors can do is to think about balance. What will work during these times? Blend equities with short-term bonds, inflation-linked bonds, real estate, and then within themes get exposure to commodities, logistics, defence, cyber security, semiconductors, India, and renewable energy. The only thing investors must not do is to base decisions on their experience over the past 12 years.

Source: Bloomberg
Source: Bloomberg and Saxo Group
Source: Bloomberg and Saxo Group

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.