U.S. stocks continued their downward correction during Thanksgiving week. In particular, the Dow Jones Industrial Average which tracks 30 large blue-chip companies had its worst Thanksgiving week since 2011.
The S&P 500, which is the index that the C Fund follows, is once again slightly in negative territory for the year-to-date, and firmly in correction territory, which means a 10%+ decline from previous highs.
The question that many investors are wondering is whether this will eventually turn into a bear market (a 20%+ decline from its peak), or if this will bounce back at some point in the next few months without going down that far.
In other words, is this the beginning of a big decline that is typically associated with the end of business cycles every 5-10 years or so, or is it merely a correction along the way of a continued bull market for another couple years?
The number to watch on the S&P 500 in the near-term is 2,581. That’s the current line of support for the index.
Over the long-term, the stock market is driven by fundamentals – things like how much revenue and profit companies earn, how fast they grow, how much they pay in dividends, and how strong their balance sheets are. However, in the short-term, there are some psychologically important technical indicators that humans and trading algorithms pay attention to. When an index gets close to recent low points, there tends to be some buying pressure, and a better chance for the index to recover.
The widely-followed S&P 500 dropped to about 2,581 in early February of this year after a rapid correction, recovered a bit, and then hit about 2,581 again in early March before recovering again:
Right now, the S&P 500 is about 2% above that previous level of support. That’s a line that a lot of investors are watching; will the index recover at that level due to increased buying pressure and some trading algorithms, or is there enough downward momentum, bearish sentiment, and negative fundamentals to slam the index down through that level and below?
Investment Banks Downgrade Economic Outlook
Several investment banks have lowered their expectations for U.S. economic growth in 2019 and thereafter.
JP Morgan, for example, expects real GDP growth to be only 1.9% in 2019:
Goldman Sachs estimates 2.5% GDP growth in 2019, 1.6% in 2020, and 1.5% in 2021. They expect the S&P 500 to end 2018 at around 2,850 as a base case, and then to hit around 3,000 by the end of 2019. Their bullish case is as high as 3,400 by the end of 2019, while their bearish case is 2,500 by the end of 2019.
Frankly, these sorts of call-outs are historically not very accurate. It’s hard to predict when a recession will occur, and a recession is defined as two consecutive quarters of negative GDP growth.
Goldman Sachs also advised investors to raise cash levels, because cash is safe and now pays a decent interest rate. For TSP investors, the G Fund is similar to cash, with current interest rates of about 3% and no interest rate risk. The key risk is dealing with inflation and low returns over long periods of time.
TSP investors who put their money in Lifecycle Funds, or other similarly diversified portfolios, naturally have a mix of domestic stocks, foreign stocks, bonds, and the G Fund, for decent diversification through the market cycle.