Market Correction: Is the Rebound Near?

Is the Stock Market Correction Over? Here's What I'm Watching

Remember that market pullback I warned about in early December? Well, it happened. The S&P 500 took a small hit, and the equal-weighted version, the RSP, got knocked down even harder. Now, the big question is: are we ready for a rebound, or is there more downside ahead?

Fund Manager Positioning: A Key Indicator

One of the things I always keep an eye on is how fund managers are positioned. Back in early December, they were practically all-in on US stocks, with a 99% exposure rate.

That's a recipe for a correction when they decide to reduce their risk. And that's exactly what happened. Think of it like a crowded theater - if everyone rushes for the exit, things get messy.

But here's the good news: those exposure levels have come down significantly. Fund managers have been scaling back, which is exactly what you want to see during a healthy market consolidation. It's like letting some air out of a balloon before it pops.

This recent pullback has actually made me a bit more optimistic. We're now back to similar levels of fund manager exposure as we saw in August, April, and January of 2024 – all periods where the stock market did very well.

Earnings Growth: A Powerful Tailwind

While the market was correcting, something interesting happened: S&P 500 earnings estimates kept moving higher. In fact, they've been growing at a pace comparable to the late 1990s, which, as many of you remember, was a fantastic time for stocks.

So, despite the recent volatility, these companies are still showing strong growth. It's like a powerful engine that's still running strong, even though the car hit a few bumps on the road.

This tells me that the bull market we've been in since late 2022 isn't over yet. The underlying fundamentals are still solid, and that's what really matters in the long run. Remember, short-term market moves are just noise. Focus on the big picture.

Interest Rates: The Wild Card

Now, there’s always a wild card, and right now it’s interest rates. The recent spike in the 10-year US government bond yield is what's been driving the market correction. It's a classic case of investors reallocating capital from riskier assets like stocks to safer bonds when rates go up. It's like a seesaw – when bonds go up, stocks often go down.

But here's the thing: interest rates don't just go up forever. They tend to follow GDP growth, which is currently hovering around 5%. And guess what? The 10-year bond yield is also around 5%. As GDP growth slows down, which I expect, the upside for rates is limited. I think we might see rates tick up a bit more, perhaps to 5.2%, but that’s likely the peak.

Once rates reverse, expect stocks to make a big move higher.

Practical Takeaways

• Don't Panic: Market corrections are normal and healthy. They allow for a reset and create opportunities.
• Watch Fund Manager Positioning: It's a good indicator of market sentiment and potential turning points.
• Focus on Earnings: Strong earnings growth is the foundation of a bull market.
• Keep an Eye on Interest Rates: They are a key driver of market volatility, but their upside is likely limited.

My Final Thought

We might see a little more downside in the short term, but I'm more optimistic about stocks now than I was a month ago. The bull market is still intact, and the underlying fundamentals are strong. Keep your eyes open, stay informed, and don't let short-term volatility derail your long-term financial goals.

Remember, investing is a marathon, not a sprint.