January 27, 2022
The ~11% correction in the SPX mostly matches the scale of recent past episodes when monetary accommodation was initially removed. The average correction over the last four tightening cycles was in the 10-15% range. However, the corrections from the prior four cycles were achieved over 2-4 months vs. the recent drawdown of just ~3 weeks. It’s possible that the quicker pace of this correction only matches expectations for a faster-than-normal removal of accommodation. It’s also possible that the correction isn’t yet complete. We’ve been clear to define this drawdown as a ‘correction,’ which falls in the ~10%-20% range. We may be long-term investors but we keep our outlook in a ~6-9 month visibility window only, where there are no signs yet of a recession-led bear market. And with the yield curve maintaining its positive slope, we’re more inclined to view this correction as consolidation within a broader, sustained bull market. Current market volatility is likely to challenge this view in coming sessions, but with oversold conditions and thin liquidity (negative option gamma etc), any positive catalyst has increased potential to squeeze markets higher.