Summary:
- Edward Jones' Mahajan discusses the possibility of a 'healthy' pullback in stocks.
- After an 18% move higher in the first half of the year, a consolidation or pullback is likely.
- Underlying fundamentals, including inflation trends and a potential Fed stance, remain intact.
- Caution is advised as the market might experience 5% to 10% corrections.
- Valuation expansion has driven the market, especially in large-cap technology stocks.
- The rest of the market shows more reasonable valuations, providing opportunities in cyclical sectors.
- Soft landing scenario and economic sentiment contribute to market stability.
- Volatility has decreased, leading to questions about potential complacency.
Is there a sense here that a lot of the gains that we had in the first half of the year, that that is it, that there really isn't a significant catalyst, at least one that's visible that's going to move this market materially higher?
Yeah. You know, look, it's a good question and one that's probably reasonable after a near 18% move higher. And if you think about the period between March and end of July, the S&P almost moved in a straight line higher with no real 5%, 10% correction that we're used to along the way. And in fact, the NASDAQ was up nearly 30% during that period. So what we'd say is one period of consolidation, a pullback, not only healthy, but probably a sign of caution and healthy caution from a market that's gone up pretty far, pretty fast. So we'd say, number one, we would expect, you know, in any given year, the norm is 1 to 3 corrections in that 5% to 10% range. We are probably due for one.
So some caution is prudent in our view here going forward. But we do think some of the underlying fundamentals that probably the market picked up on during that six-month stretch are still intact. So that includes inflation trends that are moving in the right direction, a Fed that is potentially stepping to the sidelines. And they've indicated 2024, maybe the year they start moving rates lower. And then, of course, we have this ongoing and increasing sentiment around the economy, which is now showing signs that perhaps we won't enter a period of at least two quarters of back-to-back negative GDP growth and outright recession. Slowdown may be still likely, but the market has kind of embraced this soft landing scenario. And we think, you know, all three of those probably were reasons that the markets and walls are worried that the market had climbed.
But we do think they're still intact as we head into 2024. We think a period of consolidation or a pullback may be an opportunity, especially if you hadn't participated in those very rapid for six months.
Well, that raises the questions about volatility or rather the lack thereof. I mean, basically, you had that big spike. I think it was back in March or whenever in the VIX and some other volatility measures. But it's pretty much been a stair step down ever since here. Is there a sense at all that maybe there is maybe too much complacency, I guess, is what I'm getting at, Mona, that people don't really price in the idea that things can start to pick up?