Stock-market pullbacks are price of admission. Historically, markets rise afterwards, this strategist says.

Stock-market pullbacks are price of admission. Historically, markets rise afterwards, this strategist says.

A rough Monday saw the S&P 500 close below its 50-day average, as surprisingly strong retail sales data and at least a pause in the fighting between Iran and Israel sent Treasury yields higher.

The benchmark index is now down 2% from its highs of late March, in choppy trade that has come after surprisingly hot inflation data, Middle East tension and an inauspicious start to first-quarter earnings season.

Keith Lerner, chief market strategist at Truist Advisory Services, said it’s normal for markets to pull back — only three years out of the last 40 did not see a pullback of more than 5%.

Isolating S&P 500 SPX returns and pullbacks occurring after a first-quarter gain of at least 10%, the strategist found, on average, drawdowns of 11% the rest of the year. All that said, the total return from quarters two through four averaged 11%, with 91% of those instances being positive. (1987 was of course quite the outlier.)

Lerner sees a number of factors supporting stocks, among them that the economy remains resilient. “Our motto for several months now— and the lesson from market history—is a stronger economy with fewer rate cuts is preferable to a weakening economy in need of significant rate cuts,” he said. That resilient economy should support earnings.

In addition, stocks provide a partial hedge to inflation, he said, since higher inflation is associated with a higher level of sales and rising earnings.

While oil is on the rise, recessions are typically preceded by year-over-year gains of more than 80%. The front-month contract is up just 5% over the last 52 weeks.

Finally, Lerner says there’s a strong band of price support for the S&P 500 in the 4,800 to 5,000 range, before structural support comes in at 4,600.

“The weight of the evidence in our work still suggests we are in a bull market, yet this corrective period likely has further to go in price and/or time,” concludes Lerner. “For investors on the sidelines and below target equity allocations, we would use a dollar-cost averaging approach and look to be more aggressive should we get a deeper and more normal correction.”

The market

Stock-market

futures turned higher after early losses. Gold — which Citi analysts say can reach $3,000 — edged higher. The yield on the 10-year Treasury rose 3 basis points to 4.64%.

The buzz

Fed Chair Jerome Powell is due to hold a moderated discussion with Bank of Canada Gov. Tiff Macklem — probably in more collegial tones than Bill Maher’s recent Canadian discussion. Vice Chair Philip Jefferson said if inflation is persistent, then current rates will need to be held higher for longer.

China reported stronger-than-forecast 5.3% first-quarter growth in gross domestic product, but slower-than-forecast retail sales and industrial production data for March. U.S. housing starts tumbled 15%, the government reported.

Earnings were rolling in: Johnson & Johnson bumped up the low end of its 2024 forecast as first-quarter results came in ahead of estimates. Bank of America and Morgan Stanley each beat earnings estimates. UnitedHealth stock rallied as the insurer beat earnings estimates.

U.K. shoemaker Dr. Martens lost a third of its value on a warning over U.S. demand.

The Justice Department could soon file an antitrust suit against Live Nation according to a report.

International Paper agreed to buy U.K. packaging company DS Smith in a $7.2 billion deal.

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