Bad news has been bouncing off the Teflon-like stock market over the past nine months — making selloffs like Tuesday’s appear to more and more investors like buying opportunities.
Why it matters: The S&P 500 closed at 4,479.71 on Monday, marking a 100% gain from its March 23, 2020 closing low of 2,237.40. But at some point, there could be enough bad news about the economic backdrop that stock prices fall sharply.
State of play: The doubling of the S&P in 353 days is the fastest that the market has gone up twofold since World War II.
- Year to date, the S&P has closed at new all-time highs on 49 days, the most since 1995.
- Also, the last time the S&P had a pullback of 5% or more was in October. Since 1929, the S&P has experienced nine-month streaks like this only 12 other times.
What they’re saying: "The strength of corporate earnings and unprecedented monetary and fiscal stimulus have made for a one-way trade in the equity market for quite some time now," Yung-Yu Ma, chief investment strategist for BMO Wealth Management, tells Axios.
- "The presence of a new raft of 'buy the dip' retail investors may well be one reason we’ve not seen the usual August US equity market volatility," DataTrek Research co-founder Nicholas Colas said in an email.
Threat level: Some measures of bullishness appear to be quite stretched. And extreme bullishness is generally considered a contrarian indicator for markets.
- According to Morgan Stanley data cited by the Financial Times, 56% of all stock recommendations came with “buy” ratings, the most since 2002.
- Bank of America’s Sell Side Indicator, which tracks the average Wall Street strategists' recommended allocation toward equities, was near heights last seen in 2007 going into the global financial crisis.
Zoom out: At this stage of the bull market, it would be quite normal to see stock prices tumble even as much as 10% over a short period of time before recovering quickly.
The bottom line: The stock market may very well be overdue for a sharp short-term pullback. But that would not necessarily signal the beginning of a protracted bear market.