It had to end at some point—streaks always do. After seven straight months of gains, the S&P 500 fell in September. Markets also saw the first 5%-plus peak-to-trough pullback since last fall. As we discussed in last month’s Navigator, there had been only two years since 1980 when markets did not see at least one 5%-plus intra-year pullback—odds favored seeing at least one gut check before year end. And, the market had many excuses for such a setback, from the uncertainty caused by the potential default by Evergrande, China’s second-largest property developer, ongoing supply disruptions, the Federal Reserve’s (Fed) upcoming reduction of its asset purchase program, to, of course, uncertainty emanating from Washington.
Although challenges remain, we view the September setback as providing a sharp and welcome reset to sentiment, positioning, and valuations that should ultimately lay the foundation for the bull market to extend. Overall, we remain positive but realistic about the outlook.
We remain positive and have high conviction that the global economy is on solid footing and moving past the summer growth scare. Indeed, after seeing downward revisions over recent months, our work suggests the economy is now set up for positive surprises. Global growth should be aided by peaking COVID-19 trends, the necessary rebuilding of depleted inventories, and a continued transition from a stimulus-led recovery to a good old-fashioned private-sector consumer-and business-led recovery.
We remain realistic that the environment prior to September that saw abnormally strong market returns and abnormally shallow and infrequent pullbacks is the exception rather than the norm. As we move past peak monetary and fiscal accommodation, a rising liquidity tide will not lift all boats.
October tends to be a choppy market period, and we expect a noisy earnings season given supply disruptions and the continuing debt ceiling drama, though we see the latter as having a high profile but fleeting impact to markets. Seasonal market trends turn more positive later in the month, and stocks have risen 79% of the time in the fourth quarter since 1950, with an average gain of 4%. Notably, with the recent pullback, the S&P 500’s forward P/E, while still elevated, is now at the lowest level since May of 2020. Thus, we would stick with the market’s primary uptrend and use any weakness over the coming weeks to position for further strength into year end.
Keith Lerner, CFA, CMT
Chief Market Strategist
Truist Advisory Services, Inc.
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