After such a relentless market correction, the relief rally faces a high burden of proof
It felt better, but did it mean anything? Friday’s zippy 2.1% bounce in the S & P 500 , at minimum, interrupted one of the more relentless retrenchments from a record high Wall Street had seen. The index took a mere three weeks and a day to fall just over 10% from its peak on Feb. 19 through Thursday’s close, in its way an equal and opposite reaction to the imperturbable rally that had lifted the market to those highs. Without reciting the entire lab report on what has the market under the weather, like most corrections this one has a composite of causes. It starts with the pre-existing condition of a highly concentrated, expensive index riding elevated expectations for an ideal economic and policy backdrop into 2025. An initial infection (a winter soft patch in consumer spending and a rethink of the sustainability of the AI-buildout theme) led straight to some complications: Walmart’s downbeat outlook on Feb. 20 worsened the “growth scare” while helping to kneecap the crowded momentum cohort of stocks, which included Walmart, Costco, Eli Lilly and JP Morgan, along with Nvidia, Meta Platforms and the like. Finally, the medication for the top-heavy market – rotation into value and overseas stocks – had the side effect of swamping the index due to the enormous size of stocks being sold versus those being bought. And, yes, the erratic declarations of escalating tariffs and haphazard cuts in government employment have generated a near-constant barrage of “tape bombs” to keep traders off balance. .SPX mountain 2025-02-19 S & P 500 since Feb. 19 A one-day relief bounce can’t cure all that, but Friday’s pop did at least check off a few initial boxes on the correction-comeback worksheet. The rise was overwhelmingly broad, the upside NYSE volume falling a whisper shy of 90%. At minimum, it broke an uncommonly persistent downtrend, with daily intraday losses that formed an unnervingly linear angle of descent. The S & P 500 hadn’t closed above its five-day moving average – yes, five-day – in March, until it easily surpassed it on Friday. Constructive, but not decisive. It’s mildly heartening to the bulls that the pop came on a day when a wretched University of Michigan consumer sentiment report fell shy of forecasts while showing a drop in confidence in the job market and another rise in inflation expectations. Resilience against an admittedly impressionistic and politically inflected survey is at least a decent hint that the recent sell-off already took account of the downturn in “soft data” and for the market to deepen the pullback by much from already oversold levels, it would take tangible evidence of a faltering economy. Consumer-discretionary stocks, on an equal-weighted basis, had spent weeks collapsing relative to defensive consumer staples, as seen here. A key indicator of the market’s macro message, this relationship has round-tripped since Election Day and sits somewhere close to a make-or break level. Bank of America’s consumer-stock trading desk shared a comment Friday from a client on the urgent downside reversal in cyclical stocks: “We might be late innings in the positioning unwind, but we’re early innings in the recession risk narrative. And thus, does the recession overhang/uncertainty keep mean reversion buyers on-hold?” Of course, we get more growth scares than recessions, which is a slight comfort, perhaps. We’ll get a fresh monthly retail-sales report next week, which will be a timely test of whether consumers are acting much more cautious or mostly just speaking that way to pollsters. A market low is a process The standard playbook for evaluating corrections and comebacks requires a recitation of the time-yellowed clichés: V-bottoms happen, but they are relatively rare. A market low is a process, not a moment. And short, sharp rallies are common but always have much to prove. At the S & P 500 closing print at 5,638, it had merely bounced to the high of the prior few days and sits below its mid-July peak. From here it needs to climb another 1.8% just to get back to its 200-day moving average. Larry McMillan of McMillan Analysis offers the reminder that snapback rallies in corrections often extend to a 20-day average before failing; that threshold is now 4% above where the index finished the week. One would also want to see if the market could rise on a day when the aggressive tariff threats are flying, as a further sign it is building calluses against the policy friction. Friday was a rare session when all was quiet on this front. Other modestly hopeful factors to toss onto the pile: Fast corrections such as this one are somewhat more likely to be short-lived setbacks worth buying. This drop was among the seven briefest 10% declines in history. Fundstrat Research says after all of the prior six, the market was higher three, six and 12 months later. The S & P has been down four straight weeks and it’s pretty rare to lose over five in a row. Next week’s options expiration is handicapped to exert an upward bias. And this is exactly the time of the year when seasonal forces start to turn more positive. Beyond the tactical X’s and O’s that inform the opportunistic gambits and systematic wagers of the short-term money, it’s fair to observe that the market has undergone a tidy little reset in valuation and expectations. Lower valuation In a timely call, Truist Wealth chief market strategist Keith Lerner downgraded equities to neutral in late February just after the market peaked. Last Tuesday, he suggested a decent amount of risk had been bled from the market. He noted the S & P 500 dropped two P/E points, from 22-times forward profits to about 20, in rapid fashion. In recent years, that’s around where the tape has tended to stabilize. He adds that the magnitude of the index drop roughly means “the market is ‘pricing in’ about a 1 in 3 chance of recession versus almost nothing a few weeks ago.” I’ll add that the mega-cap-growth Nasdaq 100 index, still 11% off its high, has fallen three forward-P/E turns to below 24, and is now at its ten-year average valuation premium to the S & P 500. The equal-weight S & P 500 is right at its 15-year P.E average near 16. None of this makes the market inexpensive or represents a wide margin of safety. And, of course, such ratios are only as good as the earnings forecasts, which are hanging in there but would appear to have more downside risk than upside. Yet if the urgent unwind in momentum strategies has abated (as many sell-side trading desks insist is likely), it’s plausible to look for the mega-cap tier of the market to perhaps begin showing defensive characteristics against macro and policy flux, as it has in the past. None of this adds up to an emphatic case that the messy sell-[off has run its course. Payback for two straight 20% up years might not be complete. While sentiment has soured and some oversold conditions preceded Friday’s rebound, key indicators had only begun to hint at a possible capitulative washout. And, of course, the speed and haphazard nature of the Trump administration’s policy blitz – and officials’ open willingness to accept or even invite economic pain in pursuit of their goals – are hard-to-handicap factors. I’ll continue to argue that the downside leadership of the correction did not line up with what one would expect if it were “all about tariffs.” But that doesn’t mean that President Trump’s war of choice against allies in pursuit of his version of trade parity in manufactured goods will not pressure the economy and the mindset of asset allocators indefinitely. Still, the market behavior to date – as dizzying and against-consensus has it’s been – has not deviated enough from a typical setback in a post-election growth scare to insist that the rules for assessing this market’s prospects have changed definitively with the leadership the White House.
