The drop in US equities in April following a record-setting rally will likely be short-lived, as market analysts view the geopolitical and monetary policy concerns weighing on stocks as temporary stumbling blocks.
Since the end of March, the S&P 500 is down 3.5%, the tech-heavy Nasdaq is down 3.1% and the small-cap Russell 2000 is down nearly 6.1%. The drops follow a five-month rally, with the three indexes each climbing nearly 30% from October 2023 through the end of last month.
Geopolitical tensions — including Iran's recent missile and drone attacks against Israel — have dented stocks along with rising government bond yields, still-too-high inflation that likely means a delay to the Federal Reserve's plans to cut interest rates and a US dollar that continues to strengthen. Yet stocks likely have more room to run with inflation on a slow path to policymakers' target and the prospect of the Fed easing its tough monetary policy stance.
"For now, all we have is a pullback within a bull market," said Bret Kenwell, a US investment analyst at eToro.
'Set up for a pullback'
After declining throughout much of October 2023, US stocks rallied through the end of March, with the S&P 500 climbing 27.6%, the Nasdaq composite index climbing 29.6% and the Russell 2000 jumping 29.8%. The S&P 500 hit record highs in March during the run.
"The market was set up for a pullback this month and the excuse will be bond yields, oil, geopolitics and earnings," said Paul Schatz, president and founder of Heritage Capital.
Schatz said he expected the stock market to peak in the first quarter of 2024 and then "bottom out" roughly halfway through the year, falling about 10% from the highs of late March.
This further decline is still possible, as geopolitics, rising oil prices and climbing bond yields are expected to remain key concerns for the stock market. With oil prices and inflation remaining relatively high, the Fed is unlikely to change policy course and may only cut rates once during the year, if at all.
"We need to see unemployment rise above 4% and weekly jobless claims spike to really have confidence in an impending rate cut," Schatz said. "For stocks to find a low, I am looking for a bounce and then another small leg lower in the coming weeks."
After posting significant gains for about five months, stocks in nearly all sectors fell in April, with real estate dropping 7.6%, the worst-performing sector to date in the month. The S&P 500 energy sector is up about 1% in April, largely due to surging oil prices, while communication services stocks are essentially flat, up just 0.3% in April, after climbing 33.5% over the previous five months.
Short-lived dip
The widespread decline in stocks was largely due to fatigue among investors, said Steve Deppe, chief investment officer with Nerad + Deppe Wealth Management.
"The S&P 500 gained nearly 30% in five months in a near linear manner, and prices don't move linearly forever," Deppe said. "Naturally, this pullback is long overdue and totally normal given immensely overbought conditions across most measures of momentum across all time periods."
Deppe said he expects the market's current correction to be short-lived as the dominant themes of 2024 will be continued disinflation, interest rates eventually falling from current levels, a weaker-than-expected dollar, and a Fed that ultimately eases policy.
All the market's ongoing headwinds are potentially an excuse for a reasonable dip in stocks, with the S&P 500 coming off back-to-back quarterly gains of 10% or more, said Kenwell with eToro.
"A pullback here is not only justified but healthy for the bull market to continue longer term," Kenwell said. "It's possible the pullback persists, but I'd view a 5% to 8% correction as an opportunity for long-term buyers."