For a few minutes, anyway, investors had permission to put the traumas of February and March behind them in stocks. Then Washington crashed the party and the celebration went back on ice.
The S&P 500 has come virtually straight down after peeking above its Jan. 26 high around midday Tuesday, as the legal entanglements of two former aides to President Donald Trump drained the market of cheer. More reversal than rout, the downdraft was still a blow for bulls who’ve waited six months to call the correction over.
“I don’t think this is going to create a lot of fear that will cause people to sell, but it will definitely force people to step back and refrain from buying,” said Matt Maley, equity strategist at Miller Tabak + Co. “Fewer buyers in a rather thin market can cause a further downside.”
After spending 142 trading days without a record, the dry spell ended Tuesday as the S&P 500 climbed to a new intraday high of 2,873.23. The elevation had additional poignancy, arriving the night before the 9 1/2-year bull market becomes by some measures the longest in history.
Still, if you’re tempted to bail there may be reason to restrain the impulse. If history is of any guide, investors have often been better off ignoring the clustering milestones and hanging on, because buying stocks after a breakout has proved to be a winning strategy.
Since 1927, the S&P 500 has endured 17 other prolonged stretches without records. After the drought ended, all but one saw stocks go higher over the next 12 months. On average, the index rose 13 percent, compared with 7.7 percent over any one-year period.“There is a lot of talk about the end of cycle and how close it is,” said Andrew Hopkins, head of equity research at Wilmington Trust Co., which oversees more than $80 billion. “But from an economic standpoint, it doesn’t look like that way. It looks like we’re still in pretty solid shape.”
Indeed, U.S. gross domestic product expanded at the fastest pace in four years during the April-June period and corporate America just posted two quarters of 24 percent profit increases. The buoyancy is in stark contrast with the rest of the world, where the MSCI Emerging Market Index is down 18 percent from its peak and the Stoxx Europe 600 index is headed for its third monthly decline in four.
The resilience has done little to mute bears, who say growth is peaking and a confluence of forces -- from rising interest rates to a potential global trade war -- threaten to derail the economy.
While the market is near uncharted territory, the euphoric buying that drove stocks to one of the best starts of a year is nowhere to be found. Over the past month, investors put $15 billion into exchange-traded funds that focus on U.S. stocks. That compared with $40 billion during January.
Rather than relentlessly chasing winners, investors are slowly rotating money out of darling companies, such as tech giants, and into laggards like drug makers and industrial conglomerates. A preference for safety is creeping back, with consumer staples and health-care shares leading the market over the past two months.