Finally, A Correction

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

After five positive months in a row, equities finally took a breather.At this juncture, the correction has been well-behaved with most equity sectors and equity indexes declining by -4% to -5% over the first three weeks of April, then rebounding last week and recovering as much as half of their early-April declines. It is still early to call this correction as being completed, but the preliminary requirements are in place. It’s very important to remember that we are still in a long-term Bull Market. This implies that we have more motivated buyers than sellers, and if there’s one thing that all buyers like, it’s a sale, a.k.a. correction.

If the last couple of trading days can behave, the first four months of 2024 are going to go into the record books as looking pretty good. Large cap equities continue to lead the way. The S&P 500 Index is up +7.38% YTD, after a -2.87% decline in April. The S&P 500 Equal Weighted Index is up +3.47% YTD after a decline of -4.12% in April. Equal weighting levels the playing field for the index by reducing the impact of a few giant capitalization companies. By ‘flattening the mountains,’ a broader perspective of the general market is made available. In this case, it shows that the average giant cap company has fared better than the average large cap company, which has continued to be the case for the past couple of years.  

Mid cap equities are also having a respectable four months. The S&P MidCap 400 Index is up +4.55% YTD, despite a -4.91% decline in April. Small cap equities continue to lag behind, with the S&P 600 Small Cap Index down -4.43% MTD, and down -2.08% YTD. The Russell 2000 Small Cap Index has declined -5.72% in April and is now down -0.84% YTD. The two top performing sectors in April, and YTD, have been Telecommunication Services and Energy.The S&P Telecommunication Services Sector Index is up +1.44% MTD and +17.01% YTD. The S&P Energy Sector Index is up +1.49% MTD, and up +15.38% YTD. April has rough for the S&P Biotechnology Index, down -12.07% in April and down -6.39% YTD.

Bond Markets have not had an easy April either, with the much anticipated interest rate cuts being put on hold.The Bloomberg 1-3 month T-Bill Index is up 0.41% in April, and is up +1.73% YTD. The Bloomberg US Aggregate Bond Index fell -2.43% in April, and is now -3.19% for the year. The Bloomberg Municipal Bond Index fell -1.31% in April, and is -1.69% YTD. The Bloomberg US Corporate High Yield Bond Index fell -1.05% in April, and is +0.41% YTD, and the Bloomberg US Treasury 20+ Year Index fell -6.65% in April, and is -10.22% YTD. Bond sector selection continues to be key. Short term bond interest rates remain high, with low relative volatility. Long term bond volatility remains high, even with lower relative interest rates.

Quarterly rebalancing is behind us. This is an example of a calendar event that is cyclical in nature and can provide important clues as to institutional asset allocation preferences looking forward. In this case, the buying pressure stopped almost exactly at the end of the quarter, and the correction was on. It was all so polite, so provincial, so prompt. If this correction has run its course, we have a good idea that it’s going to be more of the same for equities going forward. Large cap driven. Growth favored. Inflation and interest rate sensitive. We continue to maintain a ‘barbell allocation’ for managed portfolios. Bond and income securities are holding down one end of the barbell, while large cap and mid cap growth equities sit on the other end. This helps manage volatility while remaining exposed to Bull Market opportunities.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2024 Edward D. Foy.  [email protected],

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.