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Investors might think it's finally time to take a breather after the stock market clawed back its recent 8.5% loss over the last few weeks.
But Jeffrey Buchbinder, LPL Financial's chief equity strategist, says not so fast.
Back in July, Buchbinder sensed that the market was ripe for a correction, writing in a note that "a pullback is overdue" and predicting that a dip would emerge in August. After disappointing July jobs and ISM manufacturing reports, the market swung downwards, extending a sell-off that started in late July after the Bank of Japan unexpectedly hiked interest rates.
Now, Buchbinder predicts that another pullback is in store, and it could be right around the corner — as early as September. In an interview with Business Insider, he shared why he thinks the market hasn't bottomed yet and his top trades for when it comes.
There are a few signs pointing to an imminent correction in the coming weeks, according to Buchbinder.
First, pullbacks of 10% or greater are quite standard, even under normal economic circumstances. Buchbinder dubs these as "garden-variety corrections."
"It's more likely than not that we'll get a crunch," Buchbinder said. "Even in a positive year, the average maximum drawdown is 11%. We got 8.5% already. That's unlikely to be the worst drawdown of 2024 based on history."
There's also the election coming up later this year, which Buchbinder believes will inject added volatility into the market. He pointed out that historically the market has experienced downdrafts ahead of elections. Heightened geopolitical uncertainty in various spots around the world, such as Europe and the Middle East, could also make markets skittish.
Stocks also tend to perform worse in September in general. Although there isn't a clear reason why this month, in particular, has been the worst performer for the S&P 500 since 1950, one theory is that investors like to rebalance their portfolios before the end of summer.
"September is a very weak month seasonally, so these next three weeks would be a logical time," Buchbinder said.
If this sounds alarming, don't worry — Buchbinder emphasizes that while pullbacks happen, he still believes the US economy is on a bull market path.
"To get a bear market, which would mean a 20% decline, you really have to have a lot of evidence of a recession or certainly a major financial crisis, and we don't see signs of either of those," Buchbinder said. The market might be going through some choppiness, but Buchbinder believes underlying market fundamentals are strong — and they're improving as the market broadens out.
Buchbinder believes the S&P 500 will end the year near its current level. He's also not writing off the possibility of an end-of-year market surge: In a blue-sky scenario, AI tailwinds, continued strong corporate earnings, and a post-election rally could boost the index up a couple hundred points.
"The path to get there would probably still be bumpy, and again, it would probably take a really strong Q4 rally," Buchbinder said, adding that "rallies after elections are very common."
Buchbinder shared the following four recommendations for if a September pullback occurs.
Overall, Buchbinder is neutral on equities, but he thinks investors should take advantage of a dip to buy certain areas of the market at an attractive price.
Buchbinder likes industrials and sees this area as much more reasonably valued than the technology sector. Although not as hyped, Buchbinder points out favorable tailwinds for industrials companies. Nearshoring is on the rise as companies bring jobs closer to the US, and the possibility of a Harris victory would mean a continuation of green energy infrastructure spending.
In terms of size, Buchbinder prefers large caps over small, despite the small-cap resurgence earlier in July. In a late-stage economic cycle such as the one we're in now, Buchbinder believes that larger companies are better equipped to withstand slowing growth.
Overseas, Buchbinder also likes Japan and non-China emerging markets. He sees these two areas as Fed rate-cut beneficiaries, as a rate cut would build confidence in US economic resilience and increase inflows. While the yen carry trade has added some recent volatility to Japanese equities, Buchbinder thinks the Japanese economy will perform well long-term as consumer spending there has been increasing and Japanese exporters are doing well. China will continue to be a tough area for international investment as the possibility of tariffs or a trade war hangs in the balance this election season, he said.
Investors looking to increase exposure to these areas can do so through funds such as the Industrial Select Sector SPDR Fund (XLI), the Vanguard Large Cap ETF (VV), the iShares MSCI Japan ETF (EWJ), and the WisdomTree Emerging Markets ex-China Fund (XC).
