"We waited over 360 days for a 2% daily pullback in the S&P 500 and got it a week ago. Then we got an encore last week as volatility erupted thanks to the busiest week of earnings and a Fed that left rates unchanged," observed Jay Woods, chief global strategist at Freedom Capital Markets (NASDAQ:FRHC).
"The back-and-forth market action between the bulls and bears was as exciting as watching a Grand Slam tennis match. Sadly, the bears won this battle."
Thankfully, this week is expected to be quieter, he reckons, with a lighter economic calendar and fewer significant data points. As earnings season nears completion, with 75% of reports already in, the focus shifts to market conditions.
Correction territory
The Nasdaq 100 (NDX) has officially entered correction territory, falling over 10% from its recent peak, while the S&P 500 is 6.5% off its peak. These corrections, though unsettling, are normal annual occurrences. Several factors indicate that this time is not different:
Market cycles: Markets naturally fluctuate, pausing, retracing, and rotating without fundamental changes. Earnings growth continues, particularly among megacap companies, which are consolidating after strong performances, as seen with Nvidia's past patterns.
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Seasonal trends: August and September are typically challenging months for the market, with most bottoms occurring in October and rallies in the fourth quarter of an election year. Historical patterns suggest no reason to expect deviation this time.
Federal Reserve actions: The Fed, now in a cutting cycle, is reducing rates while unemployment remains near historical lows. This context is crucial for understanding the current economic landscape.
Sahm as normal?
The Sahm Rule, which indicates a recession when the three-month average unemployment rate rises half a percentage point above its 12-month low, has been triggered.
With unemployment increasing from a low of 3.4% to 4.3%, recession concerns are heightened. However, perspectives differ, with some experts, including Claudia Sahm herself, suggesting this time might be different. She emphasizes the need for timely Fed actions to prevent urgency in rate cuts.
Earnings reports continue to show positive surprises from S&P 500 companies, though the magnitude of these surprises is below average. This data, provided by John Butters of FactSet, highlights the current earnings trends amid the broader market movements.
As the Brits say: Keep calm and carry on!