Don’t Fear the Dip -- Just Be Ready to Buy It

The S&P 500 experienced a correction of about 5.6% from its peak in late March to mid-April before it began a rally -- the duration of which remains TBD.  This movement is typical of the market’s predictable behavior during certain times of the year; we interpret this moderate pullback as a standard seasonal correction, not particularly unusual or concerning.

Seasonal corrections in the stock market are periods when indices exhibit predictable declines at certain times of the year, influenced by factors such as tax-related selling and shifts in investment strategy.  Examples include the well-known “January Effect,” where stocks, especially those of smaller companies, often rise sharply after a December sell-off, and the “sell in May and go away” pattern (for the past couple of decades, more accurately a “sell on tax day and go away” strategy), which derives from a historically common summer slowdown in stock performance.  These patterns are underpinned by a mix of tax timing, investor behavior, and financial reporting cycles. Recognizing these trends can help investors make informed decisions about when to buy and sell.

For tactical investors, understanding this seasonality is crucial.  Strategic investors also consider it when analyzing the market’s reaction to significant events and trends in earnings, economics, and geopolitics.  The data available present some reasons to think that this year’s market adjustment might be softer than usual -- with some especially positive news on the productivity front.