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Economic Cycles & Stock Price Corrections

Even though stock prices hit new highs in September, with ECRI’s earlier growth rate cycle (GRC) downturn call still intact, the risk of a second correction in 2018 remained elevated.

This was the focus of ECRI’s CNBC interview in late August when we shared our research that, in each GRC downturn since the financial crisis, there’s been least one 10-20% equity price correction.

In February, during the first correction associated with this slowdown, the S&P dropped 10%, and it took seven months to claw back those losses – par for the course. Now, in a matter of weeks, the market has given up its gains for the year.

This is the fourth GRC downturn since 2010, each of which saw 10% or larger corrections.

- 2010: 16% correction, seven months to recover.
- 2012: about 10% and 7% corrections, eight months to recover.
- 2015-16: 12% and 13% corrections, eleven months to recover.
- 2018: 10% correction, about seven months to recover.

Moreover, the relationship between GRCs and stock price cycles has held over decades, including the pre-crisis era, before Quantitative Easing (QE). But the pattern in the pre-QE era was even more ominous.

Bottom line: Since the current GRC downturn is not over, correction risks remain, at least until our leading indicators flag the next upturn in growth.

Want to know when risk of a cycle turn is ramping up? Contact us to discuss ECRI Professional Services.

Review ECRI’s real-time track record of cycle calls that helped our clients.

August 31, CNBC

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