After an incredible rally for the last five months US and global stocks took a tumble last week as volatility returned to the market.
- The S&P 500 (SPY) fell 4.6% from its high point of the week.
- The NASDAQ 100 (QQQ) was down as much as 10% from its recent high before closing down 7.5% from the high.
Take a look at the gains, and last week’s pullback in the chart below. This is a chart of the S&P 500 and the NASDA for the year 2020.
It was one of the biggest pullbacks stocks have seen in the last five months.
Naturally, investors want to know why stocks fell, and what to expect moving forward. Here’s my take.
I See Three Reasons that Stocks Fell Last Week
Profit taking after a huge run higher: US stocks have been on fire for the last five months out of the COVID sell off. The S&P 500 was up 60% from the March low. The NASDAQ 100 was up 78% from the March low. That is a huge rally in a short amount of time and US stocks, particularly big tech, are a little over bought in the short run. When this happens, its normal for stocks to take a little breather.
Seasonal effect: September is historically the weakest month of the year for stocks. Take a look at the chart below from Reuters.
US presidential election in November is stirring some uncertainty: The US presidential election is 59 days away. This is a pretty big political event and that is creating some uncertainty. Some investors are choosing to get more conservative and that means selling stocks and buying defensive assets such as bonds, cash and gold.
What Should We Expect Moving Forward?
Despite the recent pullback I remain optimistic on stocks. I do not think this is the beginning of larger decline. I think this is a normal and healthy pullback after a huge rally. These pullbacks are usually good for stocks. It gives shares a chance to take a breather. And it also enables investors to add more cash to the market and buy shares when they are down.
At the most I could see the S&P 500 falling another 3% to 5%.
After that I see an opportunity to be active on a dip in the market.
I’ll be back with another update next week, have a great day!
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.