Numbers on the Dow matter to investors. But what’s it worth when the S&P 500 swings by 100 points? In simple terms, it’s a cool $1 trillion changing hands. With the S&P 500’s surge since late October, we’re talking about a $10 trillion+ shift.
Impressive as this sounds, context is key. A 25% uptick in four months follows a 10% decline in the prior three. Viewed from July 31st, it’s less dramatic. Historically, such rapid rallies are rare outside of post-recession rebounds or the start of market bubbles (like early 1999).
A ‘Rolling Recession’ or a Soft Landing?
We didn’t have a classic, economy-wide recession recently. However, certain sectors definitively contracted. What some economists termed a “rolling recession” could explain why overall markets held up. This might just be the reality of a “soft landing.” It raises a question – is the market partying like 1999… or is it 1995, the rare year of a Greenspan-era soft landing?
While some individual stocks may be overheated, I don’t see the broader market in that state—yet. The largest pullback since the October rally lasted all of four days at the turn of the year. It’s too early to say if a more substantial downturn is coming.
A Note on Technical Analysis
The stock market’s March 8th reversal, with new all-time highs followed by a close below the open, forms a classic “bearish engulfing pattern” on the charts. This pattern can signal the start of a deeper correction. But remember—one day doesn’t equal a trend. In this rally, pullbacks have typically lasted 2-4 days.
“Bearish engulfing patterns” are significant to experienced traders. A similar signal initiated the 2023 summer correction. At that time, a drop to 4400 on the S&P 500 seemed plausible—it ultimately went to 4100. It highlights how unsure we are about the end point of corrections when they begin.
What’s Next? Factors to Consider
If this correction extends beyond the 2-4 day norm, I don’t expect a severe decline. The rally is broadening, meaning more stocks are participating, unlike last summer where the market narrowed. This is a healthy sign.
Seasonality offers clues, but not certainty. March-May hasn’t historically been a big correction period. February has a poor seasonal pattern but was fine this year. That suggests if the market handles a weak seasonal period well, it could respond even more positively to the good seasonality of spring.
A Balanced Perspective
Beyond the expanded technical commentary, I offer these additional thoughts:
- Investor Psychology: “Partying like it’s 1999” implies irrational exuberance. Market sentiment is currently optimistic, but whether it reaches bubble-era levels is hard to know.
- Sector Rotation: If the market believes inflation is coming under control, we could see money rotating out of rate-sensitive sectors and into areas that were previously under pressure. Keep an eye on this sector rotation activity.
- The Fed Factor: Don’t underestimate the Federal Reserve. Its interest rate policies hold major sway, and unexpected announcements can cause dramatic market swings.
