Surround Market Update: Healthy Pullback

It’s the end of April, Q1 is in the books, tax season is just about behind us, weather is warming up and May flowers are beginning to bloom, so I thought now would be a good time for a brief market update.

On a personal note, I just got back from our first family vacation.  Yes, we did it, we took our 19-month-old Zain and our 3-year-old Arman on a trip to Mexico.

I take back all the judgement and the negative energy I’ve directed at families on planes with screaming kids – I now get it.

We were officially that family that everyone was glaring at as Zain screamed for 2 hours.

It’s safe to say that I need a vacation from the vacation but now that we’re home, I can say I’m glad we did it.

From watching the kids experience their first plane ride, to spending time with family (my parents and brother’s family came with us), to listening to Zain say “Hola” to everyone, it’s a trip we will always remember (even though they likely won’t remember a thing…)

I thought I would share a few pictures from the trip:

Okay back to business….

The US market (S&P 500) just experienced its first healthy pullback of 2024 and more accurately its first pullback in 5 months.

The market pulled back about 5-6% from its high.

As many of you know, a 5-6% pullback is completely normal.  I call it healthy, because every so often, we need the market to take a breather.

Before I add some perspective, let’s rewind for a minute and discuss how we got here:

How we got here:

• In early November, Federal Reserve Chair Jerome Powell hinted that the US central bank may now be finished with raising interest rates
• Remember a major reason why 2022 was such an ugly year for markets was related to interest rates going up and more importantly the uncertainty on how high they were going to go
• In fact, not only did US policymakers signal the end of interest rate hikes, but they began to pencil-in interest rate cuts in 2024
• This “pivot” was the catalyst to a strong year-end rally for both stocks and bonds
• The positive equity market trend continued into 2024 and throughout the first quarter, driven by the prospect of interest rate cuts, continued economic resilience in the US, no sign of a recession, continued artificial intelligence investment themes and relatively strong company earnings

Where are we now?

• Although inflation has come a long way from the 8-9% levels at its peak to just over 3-3.5% in the US currently, it remains stubbornly sticky and still above the central bank’s 2% target
• At the same time, the US economy has continued to remain surprisingly resilient
• Combine the sticky inflation with the economic resiliency and the 6-7 interest cuts that were once priced in, have quickly turned into 1 (maybe 2)
• Remember, the central bank’s enemy is inflation
  • Their theory is, with sticky inflation and a strong economy, why cut rates to stimulate the economy and potentially risk reigniting inflation
• Therefore, if the catalyst to the strong rally towards the end of 2023 was based on the idea that interest rate cuts were coming and now rates look like they will be higher for longer, it only makes sense that the market must give back some of that growth (Canada is a different story, as our economy is slowing our labour market is showing cracks, so we will likely get a rate cut before the US – projected for the summer)
• Combine this with the more recent Middle East geopolitical risks and you have yourself a healthy pullback

Some Perspective:

• Over the last 5-month rally ending in March, the S&P 500 index surged 25.3% – only the 7th time the benchmark has gained more than 25% over a 5-month period since World War II.
• Since the bear market bottom in 2022, the market has gained over 50%
• From October 2023 to March 2024, the S&P 500 achieved positive returns in 18 of 22 weeks
• Suffice to say, it’s about time the market experienced a pullback
• Remember that corrections are perfectly normal and the market often falls on its way up
• How often should you expect a correction?  Check out my video

“Remember, the work of a pullback in a bull market is to unwind over-aggressive positioning, drain excess optimism, reset expectations, and take prices down to meeting fundamental buyers’ conviction.”

– Mike Santoli – CNBC

This is what you want to see happen in a healthy market.

By Adil Mohammed, CFP®, CIM®, FCSI®
Wealth Advisor
Assante Financial Management Ltd.