NEW YORK, March 12 (Reuters) – Investors are cautious due to troubling market signs, following a sharp U.S. stock selloff that has erased over $4 trillion in value and all gains since President Donald Trump’s election.
Among these signs are technical indicators such as the S&P 500 closing below a critical trend line, a weakening key measure of market internals, a concerning pattern in volatility futures contracts, rising cash levels among investors, and hedge funds de-leveraging away from equities.
U.S. equities experienced a significant drop this week, with the S&P 500 briefly entering correction territory on Tuesday as uncertainty over Trump’s tariffs exacerbated concerns about economic growth.
"This is a classic S&P 500 selloff, with growth stocks taking it in the teeth," said Patrick Fruzzetti, managing director of Rose Advisors, part of wealth management firm Hightower Advisors. "With more bearish signals appearing, this could be ongoing for quite a while."
The ominous market signals add to growing anxiety about the economic outlook. A Reuters poll last week found 95% of economists across Canada, the U.S., and Mexico said the risk of a recession in their respective countries had increased following Trump’s chaotic tariff implementation.
On Monday, the S&P 500 closed below its 200-day moving average – a closely watched long-term trendline – for the first time since late 2023.
Bespoke Investment Group found that in 15 other instances when the S&P 500 stayed above its 200-day moving average for at least a year, when the index finally fell below the trendline, returns over the next year were generally weaker than normal.
"We are starting to shift more toward a downtrend," said Adam Turnquist, chief technical strategist for LPL Financial. "That alone is a warning sign."
Even with the recent slide, the S&P 500 on Monday was trading at 20.5 times earnings estimates for the next year, versus a long-term average P/E of 15.8, according to LSEG Datastream.
"Volatility, with valuations at all-time highs, has made stocks too unpredictable," Palumbo said.
Absent a signal that either confirms or denies economic fears, the market could be entering a period when sharp rallies get sold, provided investors keep rotating out of equities into bonds and from U.S. equities into markets abroad, Nomura strategist Charlie McElligott said in a note on Tuesday.
To be sure, the pullback in stocks could become an opportunity for investors. "Buying the dip" has often been a profitable strategy over the past 15 years.
"The stock market’s probably going to trade a little bit lower before we see some sort of a meaningful rebound," Wren said. "But we’re trying to stick a toe in and do a little buying."
— news from Reuters