Good morning,
Equity markets are experiencing their first multi-day pullback in quite some time, and—as is typical following an extended rally—emotions are running high. So far this week, the S&P 500, Nasdaq Composite, and Russell 2000 are down -1.74%, -2.83%, and -2.43%, respectively, through yesterday’s close—and a bit more given the softness in this morning’s futures. International indices, by comparison, are off only a fraction of that.
The VIX (Volatility Index) broke through 20 this morning—an important psychological threshold that often signals heightened fear. However, emotions seem overstated relative to the size of the pullback. The weakness is concentrated in U.S. markets, with limited global participation, and market tops rarely reverse in sharp V-shapes without an external catalyst.
In the absence of meaningful economic data or major earnings releases this week, financial media have filled the void with talk of bubbles, stretched valuations, and impending corrections. I’m not denying that valuations are rich or that a correction is overdue. However, I believe this first pullback will prove shallow and short-lived, with equity indices resuming their upward path into year-end.
Fast-twitch indicators (hour- and day-based metrics) show no flashing warning signals, and models and seasonal trends remain supportive of further gains. Interestingly, the very prevalence of “bubble” and “correction” headlines has kept sentiment subdued—almost bearish—which historically is a bullish setup.
That said, the “bubble talk” isn’t without basis. Record forward P/Es leave the market exposed to disappointment—but that feels more like next year’s problem than today’s.
Be well,
Mike