Author: David I. Templeton, Principal and Portfolio Manager
Even with the recent market pullback the S&P 500 Index remains 12.5% higher on the year. The recent pullback represents only a -3.97% decline from the high reached on October 28 and declines of greater than 5% tend to occur about once a year. Of course, earlier this year, with the tariff announcement in the March/April time period, the S&P 500 Index was down almost -18%.
Based on sentiment surveys, the federal government shutdown has influenced consumers expectations about the economy in the months ahead. As seen below both the University of Michigan Sentiment Survey and the Conference Board Consumer Confidence Index are both trending downward.
Although confidence has slipped, the recent economic data has been coming in better than economist expectations as the Citigroup Economic Surprise Index for the U.S. is positive and trending higher as can be seen below.
One factor influencing investor thoughts around the current market seems to be the fact returns have been generated from a handful of stocks this year, the so-called Magnificent 7 stocks (MAGS) and recent price action has this basket of stocks down more than the rest of the market, down over -7%. Driving much of the focus in this handful of stocks is the growth in the artificial intelligence segment of the economy. I touched on this in an article written at the end of the third quarter, All the Focus is on A.I. Certainly, there are aspects of the A.I. boom that can lead one to believe irrational exuberance is taking over the stock interest in this area. With this noted, a pullback is healthy as gains can be digested. Additionally, a rotation into parts of the market that are not trading at elevated valuation levels provide investors with places to reallocate invested dollars.
Broad Based Sentiment is Mixed
One sentiment measure that focuses on seven technical market indicators is the CNN Business Fear & Greed Index. Today's reading shows this fear gauge at the extreme fear level. These measures are contrarian ones and are the most actionable at their extremes.
In the Conference Board's October Consumer Confidence Survey, one question surveyed expectations about stock prices in the next 12-months. Almost half of the survey participants, 49.9% expect higher stock prices in 12-months. This is a near record high.
With the government shutdown in the rearview mirror and economic data being reported better than expected, this recent pullback might be positioning the market for a rally into year end. Keeping in mind though, the market often likes to move in a direction contrary to how most investors are positioned.
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