Analyst: Odds Of Correction Have Risen, 'Buying Dips May Be Rewarded'

Markets have been on a steady retreat since the start of August, trimming some of the heady gains they witnessed this year.

One analyst has broached the possibility of a pullback or a correction, said he's not overly worried in light of solid fundamentals.

Keeping Up With Seasonality

August has historically been the worst month for the market, with the S&P 500 Index down about 0.78% on an average, LPL Research's John Lynch said in a report.

Last week's 3.1% slide fits the pattern, he said.

Source: LPL Research

Lynch attributed some of the long-term historical weakness to summer vacations and fewer market participants.

"That track record and the strong gains year to date suggest risks of a pullback (5–9%) or a correction (10–19%) have risen," he said. 

Three Keys For The Market

The Fed, corporate earnings and trade are crucial to the market's performance in August, Lynch said.

Trade could come first among the market drivers in August, especially ahead of a September meeting scheduled between American and Chinese negotiators. 

Lynch forecast progress in trade talks in the coming months, although he said he expects the issue to drag on well into 2020, creating more volatility.

The Fed is likely to cut rates at least one more time this year amid the simmering trade tensions, he said — but this could support the bond and equity markets. 

"However, bouts of volatility around shifting rate cut expectations would not surprise us, with three additional cuts mostly priced in by March of 2020," Lynch said.

The market impact of the rest of the earnings season is likely to be mixed amid tariffs and other headwinds, according to LPL.

Yet the firm expects earnings to improve later this year and into 2020 as trade risks potentially abate.

"Given a still-solid fundamental backdrop overall with steady economic growth, our belief that earnings will improve, and low interest rates with support from the Fed, buying dips may be rewarded," Lynch said. 

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