Just three weeks ago, we witnessed a significant performance gap between the S&P 500 Equal Weight Index (2.48% YTD) and the market cap-based S&P 500 (6.69% YTD). This trend has accelerated, with the gap now narrowing. The latest numbers are 3.81% vs. 7.28%, a meaningful difference indicative of a substantial capital shift within the market. Funds are undeniably exiting the previously dominant tech sector and finding renewed interest in a much broader range of stocks.
This rotation, while healthy for portfolio diversification, might contribute to a more substantial correction than we’ve seen since last October. The tech giants that boast trillion-dollar market caps are losing capital, and this concentration of selling pressure could amplify potential declines.
Despite two consecutive weeks of marginal losses, the S&P 500 achieved a new all-time high last week – an intriguing anomaly. So, how deep can this correction go? History gives us some insights.
Analyzing Market Corrections: Past and Present
A 3-5% correction is always a possibility. While 10% corrections were once the norm, they’re considered significant in today’s market—though we did see such a drop last year from July to October.
It’s worth noting that seasonal patterns generally support an upward bias from March to May. The tech sector’s recent ‘sell on strength’ behavior signals a potential pullback, even if a major selloff this spring seems unlikely.
“Historical trends indicate some choppiness in the early months of a presidential election year, a pattern we haven’t experienced in 2024,” observes a seasoned market analyst. “Mid-year and post-election rallies are the typical benchmarks, but this election cycle is already outperforming those expectations.”
Factors Influencing the Market
Regardless of the magnitude of this year’s correction, or whether one even occurs, Federal Reserve Chairman Jerome Powell’s post-FOMC press conference tomorrow could trigger dramatic market shifts. His remarks have a reputation for impacting markets profoundly.
Recent CPI and PPI readings reflect increased inflation, yet the market has held its ground. Many experts attribute this resilience to the tendency of companies to institute annual price hikes in January.
“I firmly believe the downward trend in inflation remains intact,” comments a leading economist. “If this trend resumes, we can anticipate Fed rate cuts. The closer to the election those cuts occur, the more overtly political the Fed’s actions might appear.”
Market consensus appears to favor at least three rate cuts pre-election. This would likely be met favorably by both stock and bond markets. For now, all eyes are on Powell’s Wednesday statement. His recent oscillations between dovish and hawkish stances have made this an unusually unpredictable point in the interest rate cycle.
