A Market Pullback Amid Rising Global Concerns

As the saying goes, all good things must come to an end. This past September, a cascade of negative news finally weighed down a historically resilient stock market. Global supply chain disruptions, surging energy prices, COVID-19 concerns, stalled infrastructure negotiations, inflationary pressures, fears of contagion from China, and a looming Fed taper led to the end of two remarkable streaks.

For starters, the S&P 500 dropped 4.8% in September, breaking a run of seven consecutive monthly gains, the longest since a ten-month streak ending in January 2018. Additionally, the S&P 500 closed 5.1% below its record high on September 2, ending its 211-day streak without a 5% pullback, the longest since January 2018 and the 13th longest on record. To put this into perspective, the average rally lasts 72 trading days before experiencing such a pullback.

Historical Patterns and Market Sentiment

If history has a message for us, it’s not to lament the end of a streak but to appreciate the gains while they lasted. Of the 12 longer streaks, 11 occurred during extended bull markets, with only one exception—the 219-day streak that ended on February 11, 2004, which saw an 8.2% decline. However, history gives bears a silver lining as well. Of these prior streaks, five turned into 10% corrections, slightly higher than the typical 31% chance for all 5% pullbacks.

Looking forward, the big question remains: Is this recent correction a temporary adjustment before a year-end rally, or will further rotation in the market bring about a more extended correction? Investor sentiment is already cautious, with many expecting volatility to continue and bracing for a potential further market decline. Persistent supply chain issues in energy, transportation, and semiconductors keep inflation concerns elevated, and in response, investors have sold bonds, pushing interest rates higher. Additionally, softer economic data, rising input costs, increased wages, and potential tax hikes all weigh on profit margins, contributing to a more cautious market outlook. Congress’s need to address the federal debt limit soon adds yet another point of uncertainty, with a partial shutdown looming if an agreement isn’t reached.

Potential Positive Catalysts on the Horizon

Amid these uncertainties, several factors could encourage a more positive market trajectory. First, global COVID-19 cases are trending downward, with a peak in U.S. cases potentially helping economies reopen and supply chains to recover. Another bright spot is the possibility of Democrats agreeing on a sizable infrastructure package that could drive productivity and economic growth for years. And finally, if China successfully restructures and supports Evergrande while easing its monetary policy, this could mitigate the risk of contagion spreading through the economy.

No matter where the market heads, we’ll continue to monitor the economic and investment landscape and make adjustments as needed to stay aligned with our strategic objectives.

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