The S&P 500 experienced its worst week in 18 months, only to rebound on Monday with its best day in three weeks, despite little new information.
This highlights ongoing market volatility driven by uncertainty around interest rates and politics. According to Goldman Sachs, 94% of global equity indexes saw a drawdown of at least 5% over the past month.
Goldman Sachs strategists, led by Christian Mueller-Glissmann, question whether the bull market will resume or if more turbulence and risks of drawdowns lie ahead. Since 1928, the S&P 500 has experienced 22 bear markets, with 20% declines occurring every four to five years.
Drawdowns between 10% and 20% happened 15% of the time in the U.S. since 1973, with higher frequency abroad.
For drawdowns in the 10%-to-20% range, the average peak-to-trough decline is 13%, lasting about four months. Notably, these occurrences have decreased since the 1990s.
Is buying the dip a good strategy? It depends. Since 2010, buying during corrections has generally been rewarding, but the same can’t be said for the 1990s. After a decline, valuations typically drop, and sentiment becomes more bearish. While this can create opportunities, further macro and market deterioration remains a risk.
Goldman also points out that equity drawdowns often tighten financial conditions, further weighing on economic momentum.
Goldman Sachs created a model incorporating various factors such as economic indices, volatility, and valuations to predict drawdowns. While the model’s correlation to actual outcomes is low at 0.2, it shows some predictive power when levels rise above 30%. Currently, it sits at 20%, suggesting moderate risk.
In terms of portfolio strategy, the traditional 60/40 stocks-to-bonds mix is performing well as bonds benefit from current economic growth concerns and the Fed’s expected monetary easing.
However, Goldman suggests diversifying further, favoring gold, the Japanese yen, and the Swiss franc. For equities, they recommend defensive stocks, especially the U.K. FTSE 100.
