The stock market went 227 days without a 5% fall. Why it suddenly slips.

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The

S&P 500
has just fallen more than 5% from its all-time high, the first time since last September. Now investors need to decide if this is a drop worth buying.

The S&P 500 fell 1.2% to 4,354 on Thursday and finished 5% below its all-time closing high of 4,356 reached on September 2. For most of the past year, there has been no decline of 5% or more. The index passed 227 days after falling 5%, the seventh longest such streak on record, with the S&P 500 gaining 29.4% during that time.

Why are stocks finally falling? Profit estimates for companies in the index are falling as supply chain constraints make it difficult for companies to access the supplies needed to meet demand, while the higher costs associated with such shortages hurt profit margins. What’s more, bond yields have skyrocketed, in part because the Federal Reserve indicated last week that it would soon start cutting back on its monthly bond purchases.

The question now is, when is the best time to buy the dip.

While the S&P 500 has seen slight pullbacks this year, investors bought declines before the index could show a formal “correction”, defined as a 10% drop. Last week, investors were eager to buy the S&P 500 lower at 4,310 as the index moved quickly from that level. Some on Wall Street had noted that it was essential to monitor the performance of the index after it fell to this level – a convincing rebound from this point could give investors the “green light” to buy stocks again.

But if Friday’s trading leads to another sharp drop, it could indicate even more of a drop, as market participants still see risks ahead that are not yet fully reflected in stock prices. In that case, the next stop could easily be the S&P 500 200-day moving average of 4134, says John Kolovos, chief technical strategist at Macro Risk Advisors. This represents a 4% drop from Thursday’s closing level and would bring the index closer to this technical correction.

We haven’t had one for a while either.

Write to Jacob Sonenshine at [email protected]