In an unprecedented turn of events since the onset of the COVID-19 pandemic in March 2020, US stocks are poised to register their third consecutive monthly decline.
The S&P 500, a prominent indicator of market performance, officially entered correction territory on Friday, as it tumbled by 10% from the recent highs achieved nearly three months ago. While the tech-heavy Nasdaq has managed to maintain a robust year-to-date gain of more than 22%, and the S&P 500 itself is up by 8%, the Dow Jones Industrial Average has wiped out its 2023 gains, reflecting a noticeable shift in market sentiment since the summer months.
Amid these declining market conditions, Steve Sosnick, an analyst from Interactive Brokers, expressed his concerns, stating, “the onus for the market is to prove we can bottom and have a lasting rally.” He noted that while a drastic plunge might not be imminent, the prevailing market setup is far from ideal.
One significant factor contributing to this market turbulence is the Federal Reserve’s decision to adopt a stricter policy stance compared to expectations over the summer. The central bank’s commitment to a “higher for longer” interest rate policy has pushed yields higher and stocks lower. As a result, Treasury yields are now hovering near their highest levels in 16 years, causing economists to grow increasingly apprehensive about the potential implications of higher debt costs on business development and overall economic growth.
Adding to the uncertainty is a growing list of “known unknowns,” such as escalating tensions in the Middle East and a deficit debate in Washington that could potentially lead to a government shutdown. These geopolitical and domestic challenges are casting a shadow of doubt over the financial markets.
Nonetheless, it’s worth noting that the current drawdown in 2023 is not unprecedented. Ryan Detrick, the chief market strategist at Carson Group, highlighted that the S&P 500 typically experiences an average annual pullback of 14.3%. To meet this historical average, the S&P 500, currently hovering above 4,150, would need to fall to 3,950. At present, the S&P 500 is down by 9.8% from its late July peak.
Despite the recent challenges, some experts on Wall Street remain optimistic about the market’s potential to rebound by year-end. Higher yields have exerted downward pressure on stocks, but strong third-quarter earnings and a resilient U.S. economy have kept hopes alive. The market’s valuations have become more attractive as a result of the summer’s stock market fluctuations.
Investors may also draw comfort from historical trends. Detrick’s research shows that in the five previous years since 1952 when the S&P 500 experienced declines in August, September, and October, the index returned an average of 4.5% in the final two months of the year. Only in December 1957 did it produce a negative return. “Yes, stocks have been lower in the past three months, but these final two months of the year tend to be quite bullish,” Detrick emphasized.
John Stoltzfus of Oppenheimer, who previously held the highest year-end S&P target among Wall Street strategists, has revised his outlook. While he originally projected a year-end target of 4,900 when the market was at its peak in July, he now anticipates the S&P 500 concluding the year at 4,400, still representing a 6% increase from the current levels. Stoltzfus’s adjusted prediction, should it materialize, would result in the S&P 500 gaining approximately 15% for the year.
In a statement, Stoltzfus shared his perspective, stating, “We view the three-month corrective occurrence experienced by stocks since August as likely near an end. Valuations have come down substantially across the sectors… And resilience remains the operative word for the U.S. economy.”
In conclusion, with US stocks facing their third consecutive monthly decline, investors remain cautiously optimistic, closely monitoring market dynamics and potential opportunities for a year-end turnaround.
Source: Yahoo Finance
