September 10, 2023

Pullback Plays

pulling rope

Bottom Line:


We remain in a sentiment-driven pullback period as markets failed to reclaim the July 31st highs this week despite last week’s best efforts.  On average, markets retreat 10-14% in any given year despite gaining overall in 75% of them.  The first pullback for the year began in early February, lasted 105 days, and bottomed 8% lower.  The current pullback has only lasted 40 days and bottomed 5.5% lower so far.  Sentiment remains above constructive levels, making this pullback young and shallow.  For proper pullback orientation, investors need to track sentiment releases rather than economic ones.  By that measure, we have fallen half as far as we need to go before setting the stage for Santa.  In short, this is not the time to sell; this is the time to buy, and with history as our guide, you have until about mid-October to do so. 



The Full Story:


Last week’s rally fizzled into this week as long-term interest rates resumed their ascent.  The 10-year Treasury revisited 4.3%, exerting downward pressure on multiples and psychology.  As we have noted, this pullback serves a purpose for rally fans as sentiment must reload to load Santa’s pack.  This week, let’s dig a little further into the anatomy of this pullback.


Depth and Duration


Markets retrench from high points every year.  This chart chronicles the depth of annual pullbacks for the S&P 500 and total returns each year:


SP intra year declines vs calendar


Note that the average intra-year retreat is 14%.  However, this average gets skewed by some large outliers like 2008.  If we take the median rather than the average to reduce the skew, the average intra-year retreat falls to 10%.  For 2023, we hit our first intra-year peak on February 2nd at 4179 on the S&P.  The index then retreated 8% into the March lows and didn’t recover the February highs until May 18th.  In total, that 8% pullback lasted 105 days.


From there, support from economic resilience, earnings surprises, and accelerating disinflation provided the uplift to reach another intra-year high of 4588 on July 31st.  Unfortunately, stocks 20% higher mid-year led to investor overconfidence and bullishness reached threatening levels.  Stressors emerged to challenge the complacent consensus.  Interest rates, the dollar, and oil prices rose.  Chinese and European economic momentum fell.  Politics became more bellicose, and even our old foe, COVID, reemerged.  From the July highs, the S&P fell 5.5%.  Currently, we sit 3% below the July peak.  We are now 41 days into this pullback period.


Should this pullback achieve average depth and duration, we would bottom out near 4150 (the 200-day moving average) somewhere near mid-October.  For reference, we closed the week at 4440.  This is not a prediction, but it is well within the range of typical pullback behavior.  We do not anticipate an accompanying deterioration in disinflation, economic, or earnings growth, rendering this a psychological retreat rather than a fundamental retreat.  Therefore, investors should focus on sentiment levels rather than market levels for orientation.  Here are our indicators of the moment and the thresholds we would like to see met:


US investor sentiment 2023


Citigroup economic surprise index since 2009


Investor bullishness falling below 25% and/or negative readings for the Citigroup Economic Surprise index would position reality to begin exceeding expectations once again, a durable precondition for further gains.  Earnings tailwinds will then add a fundamental boost as disinflation powers profit margins–making 2024 a much more fundamental and much less sentiment-driven market.


Have a great weekend!


David S. Waddell

CEO, Chief Investment Strategist




Source: Citigroup, YCharts, Factset, Standard and Poor’s, JP morgan Asset Management


David Waddell
Author: CEO Chief Investment StrategistAfter graduating from the University of the South with a BA in Economics, David began his career with Charles Schwab & Co., Inc. in Phoenix, AZ. Having been recognized for his outstanding business development record, David was promoted to the San Francisco- based Institutional Strategic Accounts Team, which interfaced with the Big 5 accounting firms and Schwab’s largest customers. David left Schwab to continue his education at the graduate level in Boston. While earning his MBA degree with a concentration in finance and investments at the F.W. Olin School at Babson College, he was appointed by the college Trustees to manage a team of seven portfolio managers overseeing the student-managed portion of Babson’s endowment fund. David also founded the Babson Investment Management Association to assist undergraduate and graduate students with training and career path planning in the investment management field. As the firm’s Chief Investment Officer, David chairs the W&A investment committee and combines macro economic forecasting, macro market analysis and macro risk assessments to design portfolio strategies utilizing public market securities worldwide. A civic leader in Memphis, David currently acts as Chairman of Epicenter Memphis, and Co-Chair of the Memphis Chamber Chairman’s Circle while also serving as a board member for LaunchTN and the New Memphis Institute. David previously served as chairman for The Leadership Academy, the RISE Foundation, and the Economic Club of Memphis. He also chaired the capital campaign to build the “Live” stage at the Memphis Botanic Garden. David was a member of the 2004 Leadership Memphis class and has been recognized as one of Memphis’ “Top 40 under 40” by the Memphis Business Journal, and as a finalist for “Executive of the Year” in 2007. In addition to weekly columns in the Memphis Daily News and the Nashville Ledger, David has appeared in the Wall Street Journal, USA Today, Forbes, Business Week, Investment News, Institutional Investor News, The Tennessean and Memphis Business Journal. He has also made appearances on Fox Business News, Yahoo Finance, Bloomberg TV, CNBC, and CBS News and ABC News Channels. Read some of David's articles on his author page in Inside Memphis Business. David has two wonderful children, Easton and Saylor, an obedient Labradoodle named NASDAQ, and a devoted Goldendoodle named Ripley.


David S. Waddell


Chief Investment Strategist

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