Last week, the S&P 500 endured its worst one-day selloff since the immediate aftermath of Britain's surprise vote to exit the EU last summer. Although the S&P 500 gave up only 1.25 percent of its value yesterday, the decline felt more serious because the market has exhibited low volatility and traded within a tight range over the past 12 months.
Incoming data reinforce our take that the US economy has strengthened. But technical warning signs and policy concerns mean investors who invest in specific stocks and not the broader market have a better chance of outperforming.
A return to a more traditional US economic cycle would be good news for stocks as stronger growth and inflation drive pricing power, revenue growth and higher valuations. But watch these three signals to see if the economy backtracks.
Narrowing market leadership and deterioration in other technical indicators point to the growing risk of a bear-market correction in the first half of 2016. We also continue to monitor key US economic indicators for signs of further weakness.
Technical indicators from the last four bear markets to ravage US equities suggest that a correction of at least 20 percent could be in store for the S&P 500. At this juncture, the risk of a US recession remains low, which should limit the coming bear market's severity and duration. However, we'll continue to monitor our favorite economic indicators for deterioration.
The S&P 500’s flat performance this year belies a number of major market and economic trends that investors can ride to profits. These key themes will inform our investment strategy as we continue to assemble our shopping list for a potential pullback in the stock market.
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