The S&P 500 is staring down a dubious milestone – its first 3-month losing streak since the COVID-19 pandemic upended markets back in early 2020.
Barring a dramatic turnaround this week, the index will log declines in August, September and October. That hasn’t happened since a brutal 5-month free fall ended in March 2020.
The benchmark index has sunk over 10% from peaks hit in late July. After four straight down weeks, the S&P 500 dipped into correction territory last Friday.
That marks a ten percent drop from all-time highs reached just three months ago in July. However, the index remains up around 8% year-to-date.
The S&P 500, and What It Represents
For context, the S&P 500 represents the broader U.S. stock market across major sectors of the economy. It tracks the stocks of 500 large American companies selected by a committee at S&P Dow Jones Indices.
The index covers around 80% of available market capitalization. Exposure spans mega-cap technology leaders like Apple, Microsoft and Amazon to energy giants like Exxon and Chevron.
The S&P 500 functions as a barometer for the country’s economic health. The performance and reactions within the index drive news cycles and often dictate investor sentiment.
Trillions in assets are benchmarked to the S&P 500. That includes huge passive funds like those offered by Vanguard and BlackRock’s iShares. The index is also a favorite benchmark for active managers trying to beat the market.
Given its stature and ubiquity, sustained declines in the S&P 500 raise investor fears and make headlines. Its ongoing slide has been driven largely by surging inflation, rising interest rates, and recession worries.
History of Late-Year Rebounds
While unpleasant, the S&P 500’s current slump isn’t out of the ordinary from a historical perspective. The index has averaged a 14% peak-to-trough decline in intra-year pullbacks since 1950 according to data from Carson Group’s Ryan Detrick.
And when the index falters during the late summer and early fall months, strong year-end rebounds have usually followed.
In the 5 prior years where August, September and October saw declines, the S&P 500 rose 4.5% on average over November and December. The lone exception was 1957 when it managed a slight loss.
So despite growing skittishness on Wall Street, historical trends bode decently for markets to close 2023 on a high note.
Drivers of the Current Decline
Like most substantial sell-offs, fears of slowing economic growth and a hawkish Federal Reserve have driven the current slide.
Surging inflation led the Fed to rapidly raise interest rates in order to cool down demand. Higher rates pressure different areas of the market like long-duration tech stocks.
Meanwhile, recession odds have climbed as housing and manufacturing data weakened. The strong U.S. dollar has also impacted multinational corporate earnings.
Geopolitical turmoil surrounding Russia’s war in Ukraine coupled with US-China tensions exacerbated volatility. It amounted to a deteriorating backdrop that sent the S&P 500 downhill fast.
Now with consumer prices potentially peaking, Fed rate hikes slowing, and earnings holding up, optimism is regrowing. Valuations also look more attractive after the steep pullback.
Many strategists see the negativity as overdone and expect a rally into year-end. However, tests likely remain until concrete evidence of an inflation or economic slowdown emerge.
S&P 500 Outlook and Implications
While disconcerting on the surface, the S&P 500’s bout of weakness isn’t unprecedented. The question is whether it represents a normal correction or the start of a bear market.
Broadly, analysts think major indices will close out 2023 with mid-single digit gains. But forecasts vary widely from low single digits to returns over 10% above current levels.
If historic trends repeat, odds favor a recovery once the calendar flips to November. Although with midterm elections ahead, politics could play an outsized role in market swings.
Regardless, the S&P 500 ending its 3-month rut would be welcomed by investors. Sustained declines often signal greater worries about the economy and corporate profits.
Given the importance of consumer and business confidence, ending 2023 on an upswing would bode well for preventing a deeper downturn. But the Fed’s moves to squash inflation will remain an overhang into 2024.