Last month we highlighted the market’s unusual stability over the prior 4 months and noted that we should not expect this calm period to last indefinitely. Indeed, the S&P 500 declined about 7.5% from the end of February through March 30th. While we did not predict such a decline, recent market behavior aligns with our original base case for the year. We expected 1.) a modest positive year in an ongoing bull market balanced by 2.) at least one meaningful pullback along the way. As the market has now declined 9% from its late January highs, we emphasize the positive first point and de-emphasize, but not abandon, the cautious second point.
The conflict in Iran and the resulting spike in oil prices has been the clear catalyst for the decline in March. It is important to note that the Middle East accounts for about 5% of GDP and a far smaller percentage of S&P 500 earnings, according to SP Global. Of course, the increase in oil price impacts all global economies. We point out that structural changes in the US economy leave the US much more insulated from oil shocks than in previous decades. In addition to being the world’s largest oil consumer, the US is also world’s largest oil producer. A recent Evercore analysis determined that a sustained oil price spike would reduce expected GDP growth by just 0.1%. As demonstrated by the example of 2022, an oil price spike no longer means a certain recession in the US. The recent decline is less about deterioration in fundamentals and more about short term uncertainty in our view.
Initially, the market reacted remarkably resiliently. But in recent weeks, as the expected duration of the conflict has extended, the market slipped below key levels that have held for months. We have two takeaways from this. It took the market 44 calendar days to muster up a 5% pullback. Such slow-moving declines have historically occurred in bull markets and have ended in shallow declines according to data from Bluekurtic Market Insights. However, a break below a multi-month support level is typically not resolved in a matter of days. We urge patience over the coming weeks, but we encourage investors to be ready to buy. Most client accounts have money in an ultra short-term bond fund that can be used to buy stocks at attractive levels.
We have noted that many key objective indicators were not consistent with past major market tops in late January. This suggests the market will go on to make new highs this year. There have been additional positive signs over the past month, even as the market declined. Growth stocks, particularly in technology, have outperformed the broader market even during the selloff. This is a subtle sign of investor confidence. Secondly, while the media focuses on current or “spot” oil prices, the market’s expectations for oil prices at the end of the year have declined in the past few weeks. This speaks to the temporary nature of the current disruptions. Lastly, corporate earnings expectations have continued to rise according to Factset. Combined with the decline in price, the stock market is more attractively valued than it has been in some time.
In sum, the weight of the evidence suggests the recent decline is a normal pullback in the context of an ongoing bull market. We expect a choppy few weeks and we may experience lower prices in the short term. But investors should view this as buying opportunity – in the context of their proper allocation. As always, we will continue to rely on our objective indicators going forward.
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here.
