The recent decline may have some investors feeling anxious. However, these 10 points can help add some much-needed context to the pullback.
The S&P 500 and Nasdaq fell 7% and 10%, respectively, over the three trading days from September 3 to September 8 – and the sectors with the strongest year-to-date returns led the decline.
Pullbacks like these are always unsettling. However, consider these 10 points that put the recent decline into perspective.
1. This is the first three-day decline seen in three months.
It’s unusual for the equity market to ascend in an uninterrupted, straight line. In fact, this recent three-day pullback marked the first three-consecutive-day decline since June 11 and only the second since March 10.
Over the last 10 years, the equity market has commonly exhibited short bouts of volatility like this. In fact, on average, the S&P 500 typically has about 10 individual periods of three-consecutive-day declines over a six-month time period – that’s an average of almost twice a month. Volatility is part of the fabric of the market.
2. We’re back to levels of one month ago.
Despite the S&P 500’s 7% decline from September 3 to September 8, it sits at levels seen just one month ago. Additionally, the S&P 500 and Nasdaq are up 3% and 21%, respectively, year-to-date. Both were at record highs just one week ago.
3. This is still the second strongest bull market at this juncture.
Even with the recent weakness, the S&P 500 remains up about 50% from March 23 lows. This marks the second strongest start to a bull market at this juncture (117 days) on record, just below the record of 52% in 2009.
4. We’re coming off the best summer since 2009.
Even with the recent pullback, the S&P 500 posted the best summer (up 16% from Memorial Day to Labor Day) since 2009 and the second best in the last 50 years. This reflects how strong the recent momentum in the market has been despite continued COVID-19 and political uncertainties.
5. Historically, September has been the weakest month.
On a historical basis, September – particularly during an election year – has been the weakest month of the year. While volatility tends to increase during September and October, market pullbacks have on average been relatively contained and offset by a rally in November and December.
6. Pullbacks are normal.
Not only have markets rallied strongly and very quickly, it is not uncommon to see pullbacks in a given year. In fact, over the last 30 years, the market typically experiences at least three 5% or more pullbacks a year, on average. Year-to-date, this is only the third.
7. The economy is improving.
Evidenced by both the improving labor market report (1.4 million jobs added; unemployment rate fell to 8.4%) and a strong Institute for Supply Management reading (the new orders subcomponent rose to the highest level since 2004) last week, the U.S. economy continues to recover from COVID-driven weakness. Improving economic activity should remain supportive for U.S. equities.
8. A Phase 4 relief package is still expected.
Both political parties continue to jockey around a Phase 4 stimulus package, but Washington Policy Analyst Ed Mills believes an agreement will be reached. Further fiscal stimulus, particularly targeting the consumer, should be supportive of both consumer spending and the equity market.
9. Earnings are improving.
While earnings expectations had been slashed following the COVID-driven crisis, earnings throughout the second quarter came in significantly better than expectations. Going forward, earnings are expected to continue improving as full-year 2020 and 2021 EPS expectations continue to move higher.
10. U.S. equities remain technically sound.
Despite the recent pullback, U.S. equities remain above both their 50-day and 200-day moving averages. Technicians will look for these to remain levels of support. Staying above these moving averages will continue to portray a technically sound equity market.
From a sentiment perspective, several technical indicators had suggested the equity market was overbought and in need of a consolidation period. For example, amid the recent rally before this pullback, put/call ratios moved to multi-year lows – showing investor complacency – and the 14-day relative strength index rose to its highest level in 2.5 years, reaching the 99th percentile of its last 30 years of data.
The bottom line
Given how far and fast the equity market had rallied, it’s not surprising to see a period of consolidation and digestion. As valuations on both a trailing and forward basis remain near multiyear highs, the market was priced to perfection and susceptible to disappointments.
Near term, equities will likely remain volatile with the potential for further weakness due to the uncertain timing for a potential COVID vaccine, fiscal relief deliberations, the upcoming presidential election and burgeoning tensions with China. However, the trajectory for U.S. equities is higher over the next 12 months as a result of improving global economic activity, recovering earnings and still-supportive fiscal and monetary policy.
Long-term investors should continue to use periods of weakness as buying opportunities to add to favored sectors. Your financial advisor can help answer questions you may have about your unique financial plan.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Nasdaq composite is an unmanaged index of securities traded on the Nasdaq system. It is not possible to directly invest in an index. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results.
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