S&P 500 pullback “normal” but leaves “a lot of scarring”

The S&P 500 fell 2.3 percent last week, with a particularly heavy fall of 3.5 percent on Thursday.

Still, some analysts remain bullish on the US stock market.

SunTrust Advisory chief market strategist Keith Lerner suggested that the decline is normal for a bull market.

“Since the current bull market kicked off in March, there have only been two pullbacks of more than 5%,” he wrote, noting that recent bull markets have tended to have three or four setbacks over the first nine months.

“We view the latest selloff as a bout of profit-taking after a strong run,” wrote UBS Global Wealth Management’s chief investment officer Mark Haefele. “Stocks are still well-supported by a combination of Fed liquidity, attractive equity risk premiums, and a continuing recovery as economies reopen from the lockdowns.”

Others, though, note an uncertain outlook for stocks.

“The mini-tech selloff on Thursday has left a lot of scarring,” wrote Stephen Innes, chief global markets strategist at AxiCorp.

Analysts at Wolfe Research cited a possible resurgence of COVID-19 this fall as children and college students return to school and flu season begins.

Michael Kramer, founder of Mott Capital Markets, suggested that an explosion in volumes related to the selloff and the S&P 500 closing below its uptrend “indicate that momentum is likely shifting”.

Meanwhile, John Hussman, president of Hussman Investment Trust, suggested in his latest article that “valuations have broken above every historical peak, and estimated future market returns have fallen beyond the lowest points in history, including 1929”.

“Overall, we have a hypervalued market that we associate with the worst prospective 10-12 year market returns in the history of the U.S. financial markets, along with extreme bullish sentiment, tepid participation, breadth, and leadership, as well as divergent implied volatility,” he wrote.

“In my view, it’s primarily the blind faith of investors in a ‘Fed backstop’ in recent months that has enabled an extension of market valuations to the most extreme levels ever observed in history,” Hussman said.

However, Hussman expects a “real amplification of downside risks”.

“In my view, even the Federal Reserve’s use of CARES funds to buy outstanding corporate bonds will not produce solvency across the mountain of commercial real estate, mortgage, consumer, municipal, and corporate debt that I believe is quietly deteriorating,” he said.