After a record-setting August, we are now seeing some market turbulence in September. Markets were down significantly yesterday and are headed lower today. What’s going on?
First, Some Context
Using the S&P 500, with yesterday’s loss and today’s, we are now down to the level of August 19 (or just over two weeks ago). Yes, we have lost two weeks of gains. On the other hand, we have only lost two weeks of gains. We are now down just over 5 percent from all-time highs. Put a bit differently, we are still within 5 percent of all-time highs. Finally, yesterday’s loss was certainly bad, but the last time we saw a similar drop was in June, less than three months ago. In other words, yesterday was no fun, but it still leaves markets close to their highs and showing gains for the year.
Markets Acting Like Markets
That doesn’t mean we won’t see more volatility—we likely will—but it does mean that what we are seeing is, so far, completely normal. After a selloff in March and a sharp drop in June, this is just one more instance of the markets acting like the markets do. Sometimes they get ahead of themselves and then adjust. That is what it looks like is happening here.
How much more downside could we see? Given the improving medical and economic news, the current pullback seems to be driven more by a drop in investor confidence than any fundamental change. Such pullbacks tend to be short-lived, although they can be sharp. Looking at recent market history, the S&P 500 looks to have support at around 3,250, so that is a reasonable downside target if things continue to get worse. That is also consistent with the improving fundamentals.
Beyond that, the 200-day moving average trend line has historically been a good break point between a rising market and a falling one, as well as a source of market support. Right now, the trend line is now just below 3,100 for the S&P 500, suggesting that the index could drop to that level and still be in a rising trend. The current pullback is sharp, but it is still well within the normal range for a rising market.
Where We Are Today
More declines are certainly not guaranteed, of course. But it is important to understand and plan for what could happen. The real takeaway, though, is that even if we do get more volatility, the market will still remain in an uptrend, supported by improving fundamentals. Volatility is not the end of the world, but it is something we see on a regular basis.
This is where we are today. The market rose rapidly and is now pulling back a bit. But it remains close to all-time highs and in a positive trend as the fundamentals continue to improve. We might well see more of a pullback. But even if we do, that will still be within normal ranges of market behavior. Until the fundamentals change or until we see a much larger decline, this is just business as usual.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
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