By Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK (Reuters) – The first sharp decline in U.S. stocks in six months has investors wondering whether to buy the dip or wait for further declines.
After several turbulent weeks, the S&P 500 is down more than 5% from its March 28 closing high, its biggest decline since October. Although they have been rare in recent months, such declines are not uncommon: The S&P 500 has experienced an average of three declines of 5% or more each year since 1929, according to a Bank of America analysis.
Many market participants believe that the factors that led the S&P 500 to a 10% gain in the first quarter – including resilient economic growth and enthusiasm for artificial intelligence – remain in place and will support stocks over the long term. term.
Over the past week, however, sellers have taken over. The S&P 500 fell for its sixth consecutive session on Friday, the longest such streak since October 2022.
While some investors are already buying on weakness, others are waiting for more clarity on inflation trends, geopolitical tensions in the Middle East and the strength of corporate earnings before jumping in.
A pullback is “long overdue,” said King Lip, chief strategist at Baker Avenue Wealth Management. “I think it’s a garden variety correction at this point.”
Lip has started adding stock exposure for his clients and plans to buy more if stocks continue to fall. Still, he estimates the S&P 500 could fall as much as 10% from its March 28 peak.
History shows that good starts to the year are often followed by significant declines, after which the stock market usually recovers and continues to rise.
The S&P 500 saw an average maximum decline of 11% every time it gained 10% or more in the first quarter, a study from Truist Advisor Services showed. The index ended the year up in 10 out of 11 cases since 1950.
“We are not surprised that there was a slight pullback,” said Sonu Varghese, global macro strategist at Carson Group, who used the recent weakness as an opportunity to increase his positions in small-cap stocks.
“I think buyers will start to step in,” he said.
However, investors have become cautious. BofA clients sold $800 million worth of U.S. stocks last week, the third consecutive week they were net sellers, the firm announced last Tuesday.
At the same time, some volatility-sensitive funds that bought stocks as markets were rising have already started selling and could sell off more shares if markets become more turbulent. Nomura analysts estimate that these funds could dump about $45 billion in stocks if the S&P 500 moves an average of 1% over the next two weeks.
Investors also monitor the level of the Cboe Volatility Index. Although the index hovers around 19, its highest level in six months, some volatility watchers say it has not fully taken into account the inflationary concerns and geopolitical rumblings that have spooked markets in recent times. weeks.
“With the current situation in the Middle East potentially getting worse, I’m surprised short-term volatility isn’t higher,” said Seth Hickle, managing partner at Mindset Wealth Management.
“We have repositioned a small number of positions, but I am waiting to see what the profits look like before making any significant changes to our portfolios.”
Indeed, many believe next week’s earnings from some of the market’s biggest names could offer support to stocks – or further exacerbate the sell-off. Tesla, Meta Platforms, Alphabet and Microsoft are all expected to release their reports in the coming days.
So far, the benefit picture has been mixed. Netflix stock fell Friday as its plan to stop sharing subscriber numbers starting in 2025 fueled growth concerns, while Taiwan Semiconductor Manufacturing Co, the world’s largest contract chipmaker , lowered its expectations for growth in the chip sector.
“While the S&P 500 valuation remains above 20 times forward earnings…any disappointment from reports on mega-tech names could push this week’s oversold market deeper into oversold territory,” he said. writes Quincy Krosby, chief global strategist at LPL Financial, in a Friday. note.
Investors will also focus on Friday’s release of the monthly personal consumption expenditures price index, a crucial inflation data ahead of the Fed’s April 30-May 1 meeting. Stronger-than-expected inflation has eroded one of the main drivers of the bull market, with investors now expecting interest rates to fall by around 40 basis points this year, compared to 150 basis points expected in early 2024.
Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, said he had “made some dip buying in very aggressive portfolios” but remained concerned about upcoming inflation data .
“Resuming disinflation is essential” to dispel fears of a Fed rate hike, he said.
(Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; additional reporting by Laura Matthews; editing by Ira Iosebashvili and Cynthia Osterman)
