Some Pullback Can be Healthy
After rising 7% in August and enjoying a fifth straight month of gains, the S&P 500 limped into the long weekend, as the year’s best performing sector, technology, which is up over 30% year-to-date, as well as and the popular work-from-home stocks gave back some of their impressive gains. As a result, Thursday saw the biggest drop for the S&P 500 in almost 3 months and investors clearly were reluctant to buy the dip on Friday as we head into the long holiday weekend. However, trees do not grow to the sky and last month the mega-cap stocks probably got a bit overextended with Apple surging +21.4%, Facebook up +15.6%, Microsoft climbing +10.0%, Alphabet up +9.5% and Amazon up +9.1% in just 21 trading sessions in August. Therefore, a pullback is healthy as investor sentiment was becoming rather euphoric, and it is good for investors to be reminded that stocks do not just go up.
Underneath the surface we have been encouraged by the market internals, as the notable weakness in the growth stocks that have led the S&P 500 since the March lows (Russell 1000 Growth up over +30% YTD) has translated to some rotation into value stocks that have significantly underperformed (Russell 1000 Value down over -9% YTD). Furthermore, market breadth, or the ratio of advancing stocks versus declining stocks, has been decent, indicating that the recent weakness has not been somewhat selective as investors are not outright bailing on stocks and are instead considering some of the biggest stock laggards such as financials and energy. Ultimately, while this correction might cause some angst, we generally believe a pullback that reins in some of the excessive market valuations and bullish sentiment that has emerged during this historic rebound is healthy and necessary for a continuation to the rally.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO