“A year from now you may wish you had started today.” ~Karen Lamb, English Author
Question: What are your thoughts on the market pullback earlier this month?
Answer: In the days prior to and immediately following Labor Day, stock markets fell dramatically. Not surprisingly, the biggest declines were in sectors with the strongest year-to-date returns. Here are ten points that may help put the decline into perspective.
1) This Is the First Three-Day Decline in Three Months
It’s unusual for the equity market to go straight up without interruption. In fact, this recent three-day pullback marked the first three-consecutive-day decline since June 11 and only the second since March 10. On average, we typically experience about 10 individual periods of three-consecutive-day declines over a six-month time period, or on average, almost twice a month.
2) We’re Back to Levels of One Month Ago
Despite the decline from September 3 to September 8, as this is being written, markets are close to levels seen just one month ago. Volatility is part of the fabric of the market.
3) Right Now, This Is Still the Second Strongest Bull Market
Even with the recent weakness, we were up strongly from the 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
Evidence of this includes an improving labor market report—1.4 million jobs added; unemployment rate fell to 8.4%—and a strong Institute for Supply Management (ISM) 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. Further fiscal stimulus, particularly targeting the consumer, should be supportive of both consumer spending and the equity market.
9) Earnings Are Improving
While earning expectations had been slashed following the COVID-driven crisis, earnings throughout the second quarter came in significantly better than expectations. This trend is expected to continue in select sectors.
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 portrays a technically sound equity market. From a sentiment perspective, several technical indicators suggested stocks were overbought and in need of a consolidation period.
The Bottom Line
Given how far and fast the equity market had rallied, it’s not surprising to take a pause. 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, market activity is likely to remain impulsive and capricious. Reasons include all the usual suspects like a potential COVID-19 vaccine, fiscal relief deliberations, the upcoming presidential election and ongoing tensions with China. With this in mind, the outlook for select U.S. equities is expected to be higher over the next 12 months. This is based on continuing positive trends with global economic activity, recovering earnings and still-supportive fiscal and monetary policy. Stay focused and plan accordingly.
Source: Fact Set 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. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The opinions expressed are those of the writer as of September 9, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned.
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