Why Stocks Could Pull Back 10% by the End of the Year

In 2024, both the S&P 500 and Nasdaq Composite have experienced a record-breaking surge, despite ongoing struggles in some sectors of the stock market. However, potential challenges loom in the latter half of the year.

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The recent bull market saw its most significant setback in April, when the S&P 500 dropped by 5.5% between March 28 and April 19, based on FactSet data. Historically, a more substantial pullback might be anticipated. According to Dow Jones data, since 1958, the S&P 500 has endured 51 pullbacks of 10% or more, indicating that such corrections, defined as a decline of at least 10% from a recent high, typically occur annually.

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Wall Street strategists, aware of these patterns, remain cautious. Even those who have recently increased their year-end targets for the S&P 500 acknowledge the possibility of heightened volatility before 2025. Brian Belski, BMO’s chief investment strategist, highlighted that the S&P 500 has historically dropped by an average of 9.4% during the second year of a bull market, expressing doubt that 2024 would be an exception.

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Despite the likelihood of a pullback, investors might find solace in the historical trend of rapid recovery following such downturns. Belski noted that after declines during the second year of a bull market, the S&P 500 typically rebounds, averaging a 14.5% increase.

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The sustained rise of the S&P 500 and Nasdaq Composite in 2024, with the indices achieving 31 and 20 record closing highs respectively, has contributed to Wall Street's concerns about a potential market stumble. This broad rally extends beyond stocks, with gains seen in commodities, cryptocurrencies, and the U.S. dollar, while bonds are nearing recovery from year-to-date losses as Treasury yields decrease.

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However, this surface stability belies the frequent significant fluctuations in individual stock prices. A Goldman Sachs trading desk report revealed that the average S&P 500 stock has been 4.5 times more volatile than the index itself. Nvidia Corp., a leading company, has experienced dramatic share price swings, losing nearly half a trillion dollars in market value within days.

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Notably, 2024’s market performance is on track to be the best first-half showing during an election year since 1976, according to Dow Jones data. This exceptional performance contrasts with the typical election year market trends, as highlighted by Carson Group’s Chief Market Strategist Ryan Detrick.

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If the April dip remains the most significant drop of 2024, it would be the smallest inter-year decline for the S&P 500 during a presidential election year since 1972. Historically, the S&P 500 has averaged a 13% peak-to-trough fall during election years, but it has risen 14.7% year-to-date, with the Nasdaq Composite up over 18%, according to FactSet data.

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Additionally, day-to-day market calmness has been notable, suggesting a potential need for increased volatility. As of a recent Tuesday, the S&P 500 had gone 337 days without a 2% pullback, the longest streak since a 351-day stretch ending in February 2018, according to Dow Jones data. If this stability persists until mid-July, it will mark the most tranquil period for the S&P 500 since a 949-day streak ending in February 2007, as per Bespoke Investment Group.

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The market’s “fear gauge,” the Cboe Volatility Index (VIX), which measures implied volatility based on S&P 500 options trading activity, has also remained low, hinting at possible investor complacency and increased market vulnerability.

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It’s important to remember that past performance does not guarantee future market behavior. For disciplined long-term investors, short-term volatility might not be a significant concern, as history shows that stocks generally trend upwards over time.

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