Stocks are due for a pullback of up to 8% in the next 3 months, says LPL Financial

traders
Traders on the floor of the New York Stock Exchange.

  • The S&P 500 looks due to pullback by 5%-8% in upcoming months after a strong performance year-to-date.
  • LPL Financial outlined its view as the benchmark index has nearly doubled since last year’s low amid the pandemic.
  • The S&P 500 hasn’t had as much as a 5% pullback since October 2020.
  • See more stories on Insider’s business page.

The US stock market roared back swiftly from its pandemic-induced crash last year and the S&P 500 has notched a double-digit gain so far in 2021 – but its performance puts the benchmark in line for a pullback by up to 8% before the year ends, says LPL Financial.

The gauge of the largest listed companies in the US has advanced by nearly 18% this year, with record highs supported in part by expectations of robust growth in corporate earnings as companies work to regain their footing as the pandemic eases.

The S&P 500 finished 2020 up 16% by clawing out of the bear market it slid into in March 2020 as the coronavirus pandemic unfolded. The index also finished strongly in 2019, springing up by 29%.

“After more than a 90% rally off the March 2020 bear market bottom (and near double on a total return basis) we do think the odds are much higher of a standard 5-8% pullback during the historically troublesome August/September/October period,” said Ryan Detrick, chief market strategist, and Jeff Buchbinder, equity strategist, at LPL Financial, in a Monday note.

“This isn’t a bad thing though, as some type of break could be necessary before another move higher,” the strategists said in outlining what they consider six surprises in markets so far this year.

The S&P 500 through Tuesday’s session had risen by 98% since its crash and bottom on March 23, 2020. Its climb started after the index slid 34% from its peak set in mid-February 2020, with investors rattled by the prospect of an economic recession from the COVID-19 outbreak. The index staged a fast recovery in reaching an all-time high in August 2020.

“Historically, year two of a bull market can be choppy and quite frustrating. After the huge gains we saw the last nine months of 2020, we entered 2021 expecting there to be more give and take than we’ve seen this year,” said the strategists. “In fact, the S&P 500 hasn’t even had as much as a 5% pullback since October 2020, one of the longest streaks ever. That is very surprising indeed.”

The S&P 500 has been fueled by anticipation of improved earnings. Ahead of this week’s busy docket for financial results, S&P 500 companies were on track for their best profit growth since 2009, with Refinitiv estimating a rise of 78.1% year-on-year in the second quarter.

The strategists also said they’ve been surprised by the lack of volatility so far in 2021. The stock market’s fear gauge, the Cboe VIX Volatility index, has dropped by 22%, hovering around 17.

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A sharp downturn won’t scare away the horde of retail investors reshaping the market. We spoke to 5 experts and day traders who explained why they’re here to stay.

Wall Street Bets Reddit Retail Traders GameStop
In this photo illustration the WallStreetBets page seen in the background of a silhouette hand holding a mobile phone with Reddit logo. Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images

  • The surge of retail investors will likely be in the stock market for the long haul, experts told Insider.
  • Fee-free trading, access to market data, and social media, are making it easier to trade.
  • “They see it as more than just a trade or an investment. They see it as a movement,” one expert said.
  • See more stories on Insider’s business page.

The horde of retail traders who have flooded the stock market in the past year are here to stay – even when the market turns sour, experts told Insider.

Since January 2020, retail investors bought $400 billion in stocks, doubling their total equity purchases from years prior, according to Vanda Research. Stock buying had been on the upswing for years before that though as more everyday investors had better access to market data and fee-free trading, thanks to brokerage apps like Robinhood, among others.

Dave Lauer, a stock market structure expert who has been interacting with retail investors, said the COVID-19 pandemic simply accelerated the number of day traders joining the market. But now that they’re here, “they’re here to stay,” he said.

For the first time, he’s seeing hundreds of thousands of people wanting to learn about how markets work and improve them.

“They see it as more than just a trade or an investment,” he said. “They see it as a movement.”

Matt Kohrs, a 26-year-old day trader with more than 300,000 followers on his YouTube trading channel, said the community of retail investors came together because they’re “tired of the tilted game” of Wall Street.

“The driving factor is a huge social-cultural movement,” he said. “It just happens to be playing out on a stock chart.”

Retail traders have joined the stock market in droves before.

Kristina Hooper, chief global market strategist at Invesco, said the dot-com bubble in the 90s had an “extraordinary level” of retail participation.

During that time, “it was not Reddit and Wall Street Bets and forums; it was taxi drivers in New York City talking about their favorite dot-com picks,” said Darren Schuringa, the founder of ASYMmetric ETFs, a firm designed to empower retail investors.

The difference now, according to Tuttle Capital Management Chief Executive Officer Matt Tuttle, “is the access now to all sorts of information, it’s the ability to trade for free and to trade quickly, and it’s the fact that they’re connected.”

That connection, Tuttle said, has given them the buying power of institutional investors.

For example, in January, hordes of day traders mobilizing on Reddit drove shares of GameStop to sky-high prices and caused short-sellers to lose billions. The event started the trend of “meme stocks,” and since then, the traders have driven share prices of multiple other companies, like AMC Entertainment and BlackBerry, up as well.

“They’ve got some power,” Tuttle said. “What history tells you is people who have power don’t give it up, at least not willingly.”

Even a market correction isn’t likely to faze retail traders, though they’ll likely face losses and some will exit, the experts said.

Hooper said a market correction could be on the horizon, though it will be short lived and won’t dent retail appetite.

“If you only have a downturn that lasts a few days and then stocks start going back up, will it shake out a lot of retail investors? Probably not,” she said.

However, a correction could hit meme stocks “quite hard,” she said, “because if there is one area where the fundamentals aren’t backing it, it’s meme stocks.”

Lauer, on the other hand, said meme stocks might avoid a correction because they appear to trade “relatively independent of what the market is doing.”

Kohrs said because retail traders make money off volatility, they could have even “bigger gains” in a bear market if executed properly.

“If you have proper risk management,” Schuringa said, “you can make money on both sides of the trade.”

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