What Really Drove the S&P 500 Lower Nine Days in a Row

The S&P 500 just had its longest losing streak in thirty six years, falling for the ninth straight day on Friday (November 4, 2016).

This time the fall is a lot more muted – the index lost 3.1% over nine sessions compared to a cumulative 9.4% in December 1980. More recently, the longest sustained drop occurred during the heart of the financial crisis in October 2008, when the index fell for eight straight days and lost 23%.

Marketwatch discusses what happens after the index falls more than eight days in a row – out of 22 such instances since 1931, the index rose in the six months after in 16 of them for an average return of 8.9%.

Here we explore what is drove the market lower this time around.

The most obvious answer seems to be increasing uncertainty about the presidential election, or rather, increasing likelihood of Mr. Trump winning the election as polls indicate a tightening in the race (though Secretary Clinton still appears to be the favorite based on poll aggregates ). The fear seems to be based on the significant uncertainty surrounding Mr. Trump’s economic and foreign policy, and on trade in particular.

If this is indeed the case, we would expect to see cyclical sectors like technology, consumer discretionary, industrials and financials under-perform and defensive sectors like consumer staples, health care and telecom over-performing. However, the story starts to get a little mixed when we look at the data.

Which sectors dragged the most

The following two charts show the weights of each sector within the S&P 500 index and the sector based performance attribution for the S&P 500 over the nine trading days that ended on November 4th. We use the select sector SPDR ETFs as proxies for measuring performance.

As one might expect, Information Technology (almost 22% of the S&P 500) dragged the index down more than 0.80 percentage points. However, the second largest drag came from the Health Care sector, typically a defensive sector, pulling the index down by 0.62 basis points despite accounting for just 14% of the index.

Cyclical sectors like Financials and Industrials pulled down the S&P 500 return by a combined 0.26 percentage points, despite comprising about 23% of the index. In fact, Real Estate, which makes up less than 3% of the index, dragged by 0.16 percentage points.

Let’s take a look at the absolute performance of each sector and see how each performed relative to each other and the S&P 500 index.

How the sectors performed

Here’s a chart showing how the eleven sectors comprising the S&P 500 index performed over the nine trading days that ended on November 4th. Again, we use the select sector SPDR ETFs as proxies for measuring performance.

Interestingly, Real Estate and Health care sectors performed the worst over nine days, with the former falling more than 5%.

Health Care fell more than 5% over the first eight days but rallied on day 9 even as the rest of the market fell. Now, a Clinton administration is far more likely to provide a boost to healthcare services as it tries to shore up the Affordable Care Act, and perhaps expand Medicare. At the same time, it is also more likely to heavily regulate pharmaceutical companies, especially their ability to raise drug prices. Yet, almost all of the Health Care sector’s losses came from its pharmaceutical component (makes up about 38% of the sector), which is counter-intuitive in the face of a tightening race.

Consumer Discretionary and Information Technology, amongst the more cyclical of sectors, did fall more than the overall index. Note that Apple stock, which makes up about 13% of Information Technology, fell about 7.5% over this period amid mixed earnings results, accounting for a quarter of the sector’s losses.

The chart also shows that the Industrial sector was the second-best performing sector, behind utilities. The sector is populated by companies like GE, 3M, Caterpillar, Boeing – all of which would be expected to suffer if trade slows (say if Mr. Trump wins).

Financials also fell just over 1%, not far behind Industrials and significantly outperforming the overall index. While the Trump platform promises to repeal Dodd-Frank and loosen financial regulations Financials out-performing to such a degree would not be expected if the market was undergoing a true risk-off scenario. Furthermore, the yield on investors’ go-to safe asset of choice, US 10-year treasuries, actually rose about 2 basis points to 1.78 over the nine day period. The yield on 30-year US treasuries rose four basis points to 2.56, which explains why Real Estate saw a steep fall over this period.

Bottom line, it appears that the reasons behind the S&P 500’s nine-day losing streak may be a little more complex than simply attributing it to a tightening presidential race and increasing likelihood of Mr. Trump coming out ahead.

Another confounding issue at play here is the fact that the Federal Reserve appears poised to raise interest rates in December, and seems to be running out of reasons to keep rates steady (like October’s strong payroll report ). Despite this, the market does appear to be skeptical of a rate hike, for reasons we explained in a prior post .

Considering all of the various issues at play would be critical to understanding what happens beyond the election.