Are market pullbacks part of 'the script you'd expect'?

Stocks (^DJI, ^IXIC, ^GSPC) have pulled back in the last several trading sessions, already posting two consecutive losing weeks in 2024's first quarter. Is the market on track for where it should be or is it still playing catch-up from prior years?

Ned Davis Research (NDR) Chief Global Investment Strategist Tim Hayes weighs in on the market's trajectory amid inflation and interest rate pressures.

"If you have a rally like we've had, it creates a lot of optimism and creates a lot of complacency and it leaves the market vulnerable... you never know what the trigger is going to be. In this case, it was the timing of the [interest[ rate cut by the Fed [Federal Reserve], which has sort of been the trigger," Hayes tells Yahoo Finance. "But what it's done, though, is it's... improved the sentiment, so kind of relieved the optimism. In that sense, it's been a healthy correction..."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance.

This post was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: So just taking a step back and saying, look, even at the market action over the last two days, we've started to see some pressure on the broader major averages. You've got the S&P coming off its worst two-day decline in over a year. Is this the start you think ultimately of a larger pullback? Or if not, what would be the trigger here that would make investors even more concerned at least in the short term?

TIM HAYES: Well, I think actually the market has pretty much followed the script that you would expect. The worst two months of the year, if you look at the one year cycle, and also the four-year cycle, the worst two months of the year are August and September going into October. And, of course, we had the correction. And then the best time of the year is the fourth quarter and into the first quarter. The best six months of the year tend to be the fourth quarter and then the first quarter.

So the market pretty much followed that script. And it was a very broad advance. And then what we find is once you get into April, you start to encounter a lot of headwinds, seasonal and cyclical headwinds. And I say cyclical because if you look at the four-year cycle, which basically picks up that we're in an election year, the market tends to get choppy.

So if you have a rally like we've had, it creates a lot of optimism and it creates a lot of complacency. And it leaves the market vulnerable to you never know exactly what the trigger is going to be. Or I think, in this case, it was the timing of the rate cut by the Fed, which has sort of been the trigger.

But what it's done, though, is created it's improved the sentiment. So it kind of relieved the optimism. So, in that sense, it's been a healthy correction right now. We're only down about a tenth of what index you use, but less than 5%. That's pretty normal. You get three 5% corrections a year on average historically.

So, you know, I think at this point, we should also consider it healthy. And that is created oversold conditions. And now, we're moving into earnings season. And we've had some good economic data which has positive implications for the earnings come through as expected or even better than expected. That was the case the last earnings season.

So if we have a lot of tech earnings coming up here on the horizon, and that could be sort of a potential catalyst to get the market moving back into what is still a sustainable uptrend.