It’s been a rocky month. The overall stock market is down approximately 10% from its all-time high set in late September. The worst sectors during this correction have been Technology, Energy and Industrials, which have fallen 14.0%, 13.5%, and 13.3% respectively.

There are increasing signs that economic growth will slow in 2019. At this point, a full-blown recession next year seems unlikely, but it is even more unlikely that the economy accelerates in 2019. So, this recent market correction makes sense in that context. From a portfolio perspective, we have been defensively positioned, and remain in that posture.

While the market could correct further in the near term, an extended bear market is unlikely given that corporate earnings should still grow next year, albeit at a slower rate than in the current year. It is also important to remember that we are in the 10th year of the bull market that started in 2009. After 9 straight positive years, we are overdue for a correction.  To put all this in perspective, the table below outlines all the down years in the stock market since 1945 and the subsequent returns over the following two years.

Following 2 years
Down year market return Year 1 Year 2
1946 -8.1% 5.7% 5.5%
1953 -1.0% 52.6% 31.6%
1957 -10.8% 43.4% 12.0%
1962 -8.7% 22.8% 16.5%
1966 -10.1% 24.0% 11.1%
1969 -8.5% 3.9% 14.3%
1973 -14.7% -26.5% 37.2%
1974 -26.5% 37.2% 23.9%
1977 -7.2% 6.6% 18.6%
1981 -4.9% 21.6% 22.6%
1990 -3.1% 30.5% 7.6%
2000 -9.1% -11.9% -22.1%
2001 -11.9% -22.1% 28.7%
2002 -22.1% 28.7% 10.9%
2008 -37.0% 26.5% 15.1%


A couple observations:

  1. Down years are not infrequent. They have occurred 15 times in the last 73 years.
  2. In all but two cases, the returns over the following two years were strong, averaging close to 16% in each of the next two years.

In a nutshell, a down year in the stock market, every so often, should be expected.  But recovery years, during which returns are well above the long-term average of around 10%, should also be expected.

There are two potential developments that could end the current stock market slide. First and foremost, a trade deal with China would be well received by the market. With the presidential election two short years away, the administration is highly motivated to achieve a breakthrough agreement with China. I’m not sure one is a certainty, but it is possible. Second, if the economy slows or the stock market continues to correct, then the Fed may announce a pause in their rate hikes. I suspect the stock market would rally on such news from the Fed.

Throughout my career there have been periods when investors were very concerned about the future.  A crisis of confidence was how President Carter described it back in 1979.  I sense that today our country may be in a similar frame of mind.  But our country is resilient, it is constantly evolving.  It occasionally stumbles, gets off track, then finds a way to right itself.  It is a hopeful nation at its core.

With Thanksgiving just last week, I thought it would be appropriate to close this edition of Willingdon Views by mentioning a few things for which I am thankful.

I am thankful that I live in the greatest country in the world, where freedom and a chance at the American Dream exists for those brave enough to pursue it.

I give heartfelt thanks to the courageous men and women in our armed forces who fight for justice and against oppression around the world.

I am thankful that God’s grace and unconditional love are available to me and to all who seek Him, despite our faults and imperfections.

Finally, I am thankful for family and friends who support me, and even others who challenge me, or even disagree with me, for we are all, like our country, a work in process.


Michael Kayes, CFA

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