Two major stock market indexes have reached correction and bear market territory, Charles Schwab Chief Investment Strategist Liz Ann Sonders said this week, citing the effects of threatened and imposed tariffs, immigration policy concerns and uncertainty about DOGE spending cuts.
All these concerns have “contributed to pretty meaningful pullback in stocks and a spike in volatility,” she said in a market snapshot video posted Wednesday. The market slide continued Thursday, with the Dow Jones Industrial Average closing down over 420 points, or 1%, after sliding lower earlier in the day, Nasdaq down over 483 points, after also dipping lower, and the S&P 500 off over 104 points.
Sonders told ThinkAdvisor through a spokesperson Thursday: “As of yesterday's close, the Russell 2000 was in correction territory and as of intraday today, so is the Nasdaq.”
When the video was recorded earlier this week, the indexes were nearing a correction, defined as a 10% decline from a recent high, but hadn’t quite crossed the line year to date.
A fuller market picture appears when tracking the average index member maximum drawdown from year-to-date highs, she said in the video, which displayed statistics for the Dow, S&P 500, Russell 2000 and Nasdaq. By that measure the Nasdaq and Russell 2000 are in bear territory, she said. That doesn't apply to the S&P 500, Sonders told ThinkAdvisor though a spokesperson.
“This highlights the significant churn and rotation and weakness under the surface,” she said in the video, noting that macro concerns have contributed to heightened uncertainty and a manifestation into market behavior.
The average member maximum drawdown from year-to-date highs, as of Monday, was 28% for Nasdaq, 21% for the Russell 2000, 11% for the S&P 500 and 9% for the Dow, according to her presentation.
Mention of tariffs on companies’ recent fourth-quarter-earnings conference calls “went parabolic, and surpassed any of the levels that we saw during the 2018 trade war,” she said.
“Now, it's not all bad news, especially for stock-pickers and/or active investment managers. Over the trailing one-year period, only 23% of the constituents in the S&P 500 have outperformed the index itself, but that's jumped to more than 50% when looking at the trailing one-month period,” Sonders added.
She noted that the Magnificent 7 tech megastocks have encountered notable challenges so far this year, marking a departure from their previous dominance.
Several dynamics have contributed to the shift, including valuation and earnings concerns, as well as hedge funds’ actively reducing holdings in the group, reflecting worry about the merits of substantial investments in artificial intelligence, Sonders added.
“The rapid shift in performance so far this year away from some of the market's prior darlings and toward more defensive areas is a reminder to be mindful of diversification and periodic rebalancing,” she said.
“Significantly heightened policy-related uncertainty has contributed to this shift, as have traditional fundamentals like earnings and valuation concerns. Sector swings have been swift, and we expect that to generally persist throughout the year, so be mindful of staying disciplined.”
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.