Research.LeutholdGroup

It was a rough back half of August for the S&P 500 as it shed 8% in the final two weeks, overpowering the gains captured earlier in the month. In all, the S&P 500 had a loss of 4.2% for August.

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Secular bear markets will drop far below median valuation levels. Today, if the S&P 500 sank to the 25th percentile (1957-to-date data), it would lose 41%.

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A downright awful performance quarter for the S&P 500 (-16.5%) has our downside-to-median estimates at their narrowest points since May 2020.

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A 6.6% gain in the last full week of May brought the S&P 500 right back to where it started the month. As one would expect, the flat market resulted in small changes to the components of our downside estimates, but left our weighted averages for both series unchanged from the previous month.

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The April haircut in the S&P 500 (-8.8%) combined with February and January losses brought a few of our 1995-to-date “Estimating The Downside” measures very close to their 27-year medians for the first time in recent memory. At present, downside to the median is now -16%. Based on 1957-to-date, the S&P 500’s estimated downside to the median is -30%.

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The S&P 500 clawed back some of its losses from earlier in the quarter but still declined almost 5% for the first three months of 2022—breaking a streak of seven consecutive advancing quarters.

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The S&P 500 suffered its first back-to-back monthly decline since the fall of 2020. From its month-end closing high in December to the end of February, the index has shed 8.2%. Over those two months, our downside-to-median estimates have both shrunk by a similar 7%.

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With a price decline of -5.2%, the S&P 500 suffered its worst month since March 2020. The carnage would have been much more severe (and downside estimates more rosy) had it not bounced +4.4% in the last two trading days.

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The S&P 500 closed out 2021 with a solid +4.4% monthly price gain. For the year, it clobbered all other indexes—foreign and domestic—with a +27% jump.

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Spooked by the new Covid variant and a more hawkish Fed, the S&P 500 gave up its November gains in the last few trading days of the month. Its loss of -0.8% was minimal compared to other market cap tiers.

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The S&P 500 gained 6.9% in October—it was the best month in a year. The steep rise in prices more than cancelled-out the brief dip in September. However, improving fundamentals limited the adjustments within our downside estimates.

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The S&P 500 shed 4.8% in September—its worst month since the panic of March 2020. This trimming of the numerator helped make our downside to median estimates a little less negative. In fact, these are the “best” figures we’ve seen since February.

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The S&P 500 stayed on cruise control in August, notching its seventh consecutive monthly gain. During that streak, our downside to median estimates have remained in a tight range as both numerators and denominators increased.

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Make that six consecutive months of advances for the S&P 500. Since the end of January, the index has gained 18% (price return) while our downside-to-median estimates have widened very little, to -43% from -41% (1957-to-date) and to -32% from -29% (new era 1995-to-date).

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The S&P 500 posted its fifth consecutive monthly advance in June and its fifth consecutive quarterly advance as we closed out Q2-21. The index’s 8.2% second quarter gain has not exacerbated our downside-to-median estimates, which stand exactly where they did at the end of March.

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The S&P 500 posted its fourth consecutive winning month in May. It was a modest gain (+0.6%), but all of our downside estimates managed to improve—a testament to the rapidly rising fundamentals.

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As the S&P 500 continues setting new records, so do our downside-to-median estimates. Once again, dramatically improving fundamentals could not keep pace with the index’s rise in price.

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The S&P 500 gained 4.2% in March. Again, as has been the case since last summer, improving underlying fundamentals have not been able to offset the rise in the index’s price.

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Back To Median Levels

This multi-factor estimate of stock market risk is based on a regression to median stock market levels. The valuation comparisons shown in the itemized tables consider all inflation periods since 1957. The summary tables present: 1) “all years” 1926-to-date; 2) periods of low (< 3%) inflation; and, 3) periods of high (> 5%) inflation.

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The S&P 500 had a monthly loss of 1% to start 2021. This moved our downside-to-median estimate just a tick under its contemporary extreme of -42%.

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