March 26, 2019

Following the strong 2019 rally, are we overdue for a pullback?

What Type of Pullback Could We See? Modest Pullback or Something Bigger?

The S&P 500 Index corrected nearly 20% from the September peak until December 24 before staging a furious rally of 19%. What could happen next? A well-deserved pullback would be perfectly normal, and in fact, is probably needed before another surge higher can occur. Now the $64,000 question: Would a pullback be a retest of the December lows, a 10% correction, or something more modest?

We think a pullback in the range of 4–6% is the most likely scenario. We continue to see solid fundamentals, valuations that are quite reasonable, the strong possibility of a U.S.-China trade deal over the coming months, and healthy market technicals. In fact, six technical indicators we mentioned in the recent commentary suggest a pullback could offer buying opportunities for suitable investors:

• The S&P 500 is above its upward sloping 50-day moving average (MA), suggesting an improving trend, and at support in the form of its 200-day moving average.
• March has been the second strongest month for the stock market over the past 20 years.
• Stocks tend to go up in the final 10 months of a year (25 out of the last 27 years) after experiencing gains during January and February.
• Market breadth is favorable, with a high proportion of stocks participating in this year’s advance.
• Investor flows have been negative in 2019—evidence of caution, not euphoria
• Investor sentiment surveys suggest bulls are not in overabundance.

Last, it’s important to remember that the S&P 500 has been higher a year after every midterm election since World War II—that’s 18 out of the past 18 midterms—with an average return of 14.2%. President Trump views the stock market as part of his re-election path, suggesting this pattern could hold once again. With the S&P 500 up only 1.3% since the midterm election last November, there indeed could still be room for stocks to run in 2019.