- The stock market’s correction late last year was consistent with its historical pre-recession pattern, judging by its median decline before prior meltdowns, according to RBC Capital Markets.
- The sell-off was driven by concerns about US economic growth and to what extent the Federal Reserve was mitigating a slowdown.
- Although stocks have rebounded from their lows, Lori Calvasina, RBC’s head of US equity strategy, says they are still poised to face a big test of whether these growth fears are valid or not.
The so-called Santa rally was nowhere to be found at the end of 2018.
Instead, investors endured a 20% correction from mid-September peak through Christmas Eve. Not only was it driven by fears of an economic recession, its scope was eerily similar to the sell-offs that preceded prior economic calamities, according to RBC Capital Markets.
Data from the firm showed the median drop in the S&P 500 prior to recessions dating back to the 1930s was 24%. The average was higher — at 32% — but skewed by uncommon downturns like the Great Recession and tech bubble.
Despite this, Lori Calvasina, RBC’s head of US equity strategy, remains bullish on stocks — so much so that she raised her year-end price target for the S&P 500 to 2,950 from 2,900.
But even as one of Wall Street’s biggest bulls, she says the next couple of weeks are full of hurdles that must be cleared in order to lift uncertainty about the economy and company’s earnings potential by extension. If stocks proceed to price in a mild recession, the S&P 500 could tumble to as low as 2,200, Calvasina said, in line with its median peak-to-trough decline before prior economic slowdowns.
“Stocks face a big test in early 2Q,” she said in a note to clients.
She added: “We continue to believe the US economy will soon climb out of the rough patch that the stock market paid the price for in December. But for stocks to hang on to their YTD gains near-term and/or climb higher from here we think investors will need to see evidence that the economy is back on track relatively soon.”