Stocks look set for further gains, but there’s good reason to believe 2018 will bring a full-throttle correction (10 percent decline), after this year’s shallow sell-off and low volatility.
Strategists surveyed by CNBC expect a median gain of about 5 percent for 2018, for the S&P 500, and many expect some type of correction.
Strategas Research technical analysts studied the years since 1945 when there were shallow drawdowns of 6 percent or less and found 9 instances. This year, the S&P’s biggest sell-off was less than 3 percent, and the index is up about 20 percent for the year.
In the years with shallow sell-offs of 6 percent or smaller, including this year, the S&P mostly saw strong double-digit gains, averaging about 25 percent. The drawdowns averaged about 4 percent. In the following year, the S&P mostly saw a larger drawdown, averaging about 12 percent, but ranging between 6 and 26 percent.
The S&P’s performance in the following year was mixed, averaging a 5 percent gain — the same level forecast for next year.
“The market is in good shape, but we should expect it to get harder. This year was an outlier in terms of volatility,” said Todd Sohn, technical analyst at Strategas. “The market is not narrowing here. The big picture is eight out of every 10 stocks are in an uptrend. That’s pretty strong, and it’s hard to make the case” for a correction.
Sohn said, however, history is on the side of a more significant sell-off for 2018, but it would be a dip to buy. “You will get some form of correction. … It doesn’t have to be a full 10 percent … it could be something in the 8 to 10 percent range,” he said.