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S&P 500: Correction Here Could Be a Great Buying Opportunity for Long-Term Bulls

Published 03/11/2024, 07:48 AM
  • Should you buy in case stocks correct 10% from current levels? We will try and answer that question through data.
  • Meanwhile, mutual funds still can't beat the market. This happened not just in 2023, it's been 14 years that most of them can't. We'll talk about better alternatives.
  • Cathie Wood weighs in on the problem Nvidia (NASDAQ:NVDA) could face going forward. We'll see what she says after missing the stock's rally.
  • Investing in the stock market? Take advantage of our InvestingPro discounts. More information at the end of this article.
  • Last week was exceptional, marked by record highs in the US, German, and French stock markets. Alongside these indexes, gold and Bitcoin surged as well, making new highs in the process.

    In this piece, we will focus on the S&P 500 index's performance this year and the outlook going forward. The reasons behind bulls' strength are well-known:

    • Expectations that the Federal Reserve will reduce interest rates this year, with two or three potential moves, possibly starting as early as June.
    • Corporate earnings are outperforming expectations.
    • The US economy is moving away from the risk of a recession.
    • It's a pre-election year, and historically, these tend to perform well.
    • Following the historical pattern where a rise in the S&P 500 from November to February often leads to a positive rest of the year.

    Currently, all S&P 500 sectors are above their respective 50-day moving averages, and in 2024, it has already set 17 all-time highs, marking 1,200 in its entire history.

    Ideally, for the S&P 500, a pullback would be healthy, allowing for some breathing room to brace for another surge later this year.

    It's crucial to note that the S&P 500 has surged around 75% since March 2020. The index made new all-time highs in the process and is currently valued at 21 times expected earnings for the next year, indicating that it's not considered cheap.

    A short-term correction, even at -10%, would be considered healthy. This is a normal occurrence amid bull markets, considering the index has experienced at least a -10% drop in the last 95 years. Such a dip could present a good opportunity to buy again.

    March historically has been characterized by starting well and then turning challenging for the last 21 years. Whether or not a significant fall occurs in March, the idea is to consider a decline as an opportunity to buy, even if it's at 10% or more.

    The S&P 500 company results have generally been excellent, with 75% beating expectations, and earnings showing a +4% increase in the fourth quarter.

    Noteworthy sectors include Communication Services (NYSE:XLC), Consumer Discretionary (NYSE:XLY), utilities (NYSE:XLU), and technology (NYSE:XLK), while energy (NYSE:XLE), Materials (NYSE:XLB), health care (NYSE:XLV), and financials (NYSE:XLF) have performed relatively weaker.

    There were a few companies that achieved a much larger gain than Wall Street expected:

    • Illumina (NASDAQ:ILMN): +652%.
    • Uber Technologies (NYSE:UBER) +300%.
    • Southwest Airlines (NYSE:LUV) +200%.
    • American Airlines (NASDAQ:AAL) +150%
    • Corteva (NYSE:CTVA) +140%
    • Ford Motor (NYSE:F) +130% Ford Motor (NYSE: ) +130%
    • Insulet (NASDAQ:PODD) +118% Clorox (NYSE: Clorox) +118% Clorox
    • Clorox (NYSE:CLX) +100%

    On the other hand, others were not so lucky and their results were worse than expected by the market, such as:

    • Citigroup (NYSE:C) -1162%
    • Truist Financial (NYSE:TFC) -620%
    • Airbnb (NASDAQ:ABNB) -195%
    • Humana (NYSE:HUM) -190%
    • Comerica (NYSE:CMA) -40%.

    Mutual Funds Still Can't Beat the Market

    Most active mutual funds aim to outperform the market, hoping to generate profits for investors who, in return, pay substantial commissions.

    However, recent data shows that the majority of these funds, particularly those investing in U.S. stocks, fell short of beating the S&P 500 in 2023—over 60% to be precise, according to the S&P Dow Jones Index report.

    This trend is not unique to 2023; it extends over the past 14 fiscal years. Over time, a diminishing number of active funds have managed to surpass the S&P 500.

    Consequently, opting for actively managed funds might not be a sensible choice, especially considering that passively managed funds like ETFs are gaining popularity.

    ETFs, designed to replicate stock market indexes, offer a two-fold advantage. Firstly, they don't aim to outperform the market but rather mimic its performance.

    Historically, this strategy has proven successful, as the stock market tends to be a profitable long-term investment.

    Secondly, ETFs typically charge lower fees compared to traditional mutual funds. Therefore, investors are increasingly favoring these passive funds, recognizing the cost-effectiveness and historical success associated with replicating market indexes.

    Cathie Wood Speaks on Nvidia

    Cathie Wood missed the Nvidia rally, selling a stake of up to 772,884 shares in Ark Innovation's flagship ETF for two months through January 2023.

    It is always interesting to hear what Cathie Wood says about Nvidia. Unlike Cisco (NASDAQ:CSCO) during the dotcom era, Nvidia faces stiff competition.

    Not only because Advanced Micro Devices (NASDAQ:AMD) is succeeding, but also because Nvidia's customers are designing their own artificial intelligence chips.

    Well, regardless of whether he is right or wrong, what is certain is that in 2024 Nvidia is up +84% and its ETF is down -3%.

    Stock Market Rankings 2024

    The year-to-date ranking of the major stock exchanges goes as follows:

    Investor Sentiment

    Bullish sentiment, i.e. expectations that stock prices will rise over the next six months, rose 5.2 percentage points to 51.7% and remains above its historical average of 37.5%.

    Bearish sentiment, i.e., expectations that stock prices will fall over the next six months, is at 21.8% and remains below its historical average of 31%.


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    Disclaimer: The author does not own any of these shares. This content, which is prepared for purely educational purposes, cannot be considered as investment advice.

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