The Stock Market is Prone to Pullbacks, According to a Strategist Who Expects Bumpy Gains in the Near Future

Monday witnessed a turbulent day for the S&P 500, closing below its 50-day average as unexpectedly robust retail sales data and a pause in the conflict between Iran and Israel pushed Treasury yields higher.

‍

The benchmark index has now retreated 2% from its late March highs amidst volatile trading, following a string of events including surprisingly high inflation data, heightened tensions in the Middle East, and a lackluster start to the first-quarter earnings season.

‍

Keith Lerner, chief market strategist at Truist Advisory Services, noted that market pullbacks are not uncommon, with only three out of the last 40 years not experiencing a pullback exceeding 5%. Analyzing S&P 500 returns and pullbacks following first-quarter gains of at least 10%, Lerner found an average drawdown of 11% for the remainder of the year. Nonetheless, the total return from the second to fourth quarters averaged 11%, with 91% of those instances yielding positive returns. (The outlier was the tumultuous year of 1987.)

‍

Lerner identified several factors supporting stocks, including the resilience of the economy. "Our motto for several months now — and the lesson from market history — is that a stronger economy with fewer rate cuts is preferable to a weakening economy in need of significant rate cuts," he stated. This resilient economy is expected to bolster earnings.

‍

Moreover, Lerner highlighted that stocks offer a partial hedge against inflation, as higher inflation tends to correlate with increased sales and rising earnings.

‍

While oil prices have been climbing, Lerner noted that recessions typically follow year-over-year oil price gains of more than 80%. Currently, the front-month contract has only risen by 5% over the past 52 weeks.

‍

Finally, Lerner pointed out a strong price support band for the S&P 500 in the range of 4,800 to 5,000, with structural support kicking in at 4,600. Despite this, he concluded that the weight of the evidence suggests the market is still in a bull phase, albeit with the ongoing corrective period likely to persist in terms of price and/or time.

‍

For investors with sidelined funds or below-target equity allocations, he recommended employing a dollar-cost averaging approach and considering a more aggressive stance during a deeper and more typical correction.

‍

In market news, stock-market futures turned higher after early losses. Gold edged up, and the yield on the 10-year Treasury rose to 4.64%.

‍

Federal Reserve Chair Jerome Powell is set to engage in a moderated discussion with Bank of Canada Governor Tiff Macklem, with Vice Chair Philip Jefferson emphasizing that if inflation persists, current rates may need to remain elevated for a longer duration.

‍

China reported stronger-than-expected 5.3% first-quarter GDP growth but slower-than-forecast retail sales and industrial production data for March. In the U.S., housing starts declined by 15%, as reported by the government.

‍

Earnings updates included Johnson & Johnson raising the low end of its 2024 forecast, Bank of America and Morgan Stanley beating earnings estimates, and UnitedHealth rallying as it surpassed earnings expectations.

‍