Risk-reward improved following pullback 

Market Perspective

April 22, 2024

What happened

After a five-month winning streak, April has been less kind to stocks. The S&P 500 has declined three-straight weeks and suffered the first correction of at least 5% for the year. The tech sector is down more than 9% from its recent peak, while more interest rate-sensitive areas, such as mid and small caps, are down over 6%, and the real estate sector is down more than 11%.

Our take

Pullbacks are always uncomfortable and always come with bad news. However, with stocks, it’s often two steps forward, one step back. As we often say, pullbacks are the admission price to the market.

Investors may recall that after 10%-plus first quarters, such as what occurred this year, the maximum pullback the rest of the year has averaged 11% (median 7%), with the shallowest pullback in any of these years being just 4%. Moreover, there has only been three years since 1980 in which the market did not see at least one 5% pullback during the year.

Notably, since March 9, 2009, where stocks bottomed following the Global Financial Crisis, we count 28 previous pullbacks of at least 5% for the S&P 500. Impressively, despite these setbacks, stocks are up 634% on a price basis and 886% including dividends over that entire period.

The pullbacks since 2009 have been in a wide range with a median decline of 7.5% (10.4% average) over 30 calendar days (average 50 days). This compares to the current decline of 5.5% over 22 days.

Based on the median and average pullbacks, that suggests downside from current levels would be limited to somewhere between 2% to 5% (S&P 500 level of roughly 4700-4850). This also corresponds with a level where there is strong technical price support for the market.

What’s also important to recognize is once the market finds its low, the subsequent market gain was almost 20%, on average, before the next correction ensured. 

Other factors supporting that the primary trend is still positive:

  • Market is now the most oversold in our work since October 2023
  • U.S. GDP growth forecasts continue to get revised higher
  • S&P 500 forward earnings estimates just made another record high
  • Investors already braced for a more hawkish Federal Reserve (Fed) – market now pricing in just 1.7 cuts versus 6.3 cuts coming into 2024
  • Investor sentiment is less ebullient after the recent correction and suggests the bar for positive surprises has been lowered
  • The leaders are often the last to fall during a corrective phase – and we saw a sharp decline in technology stocks late last week

Bottom line

The weight of the evidence in our work suggests the market’s risk/reward has improved following the recent setback. Therefore, we view the recent pullback as an opportunity for those investors who have excess cash or are underweight equities relative to their target allocations. 

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