What You Need to Know
- The recent selloff hit a relatively small slice of the market.
- The S&P 500 has already recovered all of its August decline and is now just 2.2% away from its mid-July record high.
- On the other hand, the economic risk that the Fed has waited too long to start cutting rates hasn’t gone away.
With U.S. equities on the rebound, this summer’s selloff is looking more like a pause in the bull market than the beginning of its end.
Of course, traders have struggled to forecast where the economy is headed — and the recession fears that helped drive the recent pullback could resurface again just as quickly as they faded. On top of that, the U.S. elections and geopolitical tensions are adding other elements of uncertainty.
But beneath the surface, there are some reassuring signals. Among them: The selloff hit a relatively small slice of the market, with nowhere near the breadth of the routs set off by the Federal Reserve’s rate hikes, the pandemic and other pivotal events.
And while valuations are at risk of another recalibration if the economy does wind up sputtering, the S&P 500 Index during the recent retreat held above a threshold that — to technical analysts, at least — telegraphs investors’ continued confidence.
Moreover, the benchmark has already recovered all of its August decline and is now just 2.2% away from its mid-July record high.
Contained Selloff
While the slide that started last month was sharp and swift, sending the tech-heavy Nasdaq 100 Index into a technical correction in three weeks, it was driven by a narrow number of stocks.
During its depths, only about 5% of S&P 500 members fell to a one-year low, according to data compiled by Bloomberg. That means the drop had a far more limited scope than previous ones set off by major macroeconomic shifts.
After the inflation surge drove the Fed to hike rates aggressively in 2022, nearly half the index tumbled to a 12-month low. The pandemic sent about two-thirds to that level.
![Breadth of Selloff Is Tiny Compared With Past Routs | Market internals are not flashing real stress levels just yet](https://images.thinkadvisor.com/contrib/content/uploads/sites/415/2024/08/415088836.jpg)
Limited Drawdown
Before last month, the S&P 500 had been on its longest stretch without a 2% one-day decline since the start of the global financial crisis in 2007. From one perspective, that makes the reset look overdue.
Unlike the Nasdaq 100 — whose drop reflected long-simmering concerns about heady tech valuations — the S&P 500 never dipped into official correction territory, rebounding after an 8.5% drop from its peak.