Recently, U.S. stocks have been struggling. However, history demonstrates that investors who have the guts to purchase when the market is declining are frequently rewarded—as long as they have the fortitude to wait out any potential subsequent dip.
Warren Pies of 3Fourteen Research offers some advice for those unsure of when it would be wise to begin investing in U.S. stocks.
Pies is a bit of an authority on stock market declines. He and his colleagues conducted a thorough analysis of all stock market declines since 1950 more than a year ago. In a report released to MarketWatch on Friday, they updated that work and included some new, current information.
3Fourteen has found 128 cases since 1950 in which the S&P 500 SPX fell 5% or more from a rolling three-month high. Investors who were ready to take a chance and purchase these pullbacks were typically promptly compensated. Nevertheless, the decline snowballed into a correction or worse in over 40% of cases.
Almost 60% of the 42 corrections Pies discovered later became significant corrections. This seems to be a significant turning point because the likelihood that a bear market, which Pies and his team define as a decline of 20% or more from the highs, would eventually ensue increased to almost 70% once a selloff entered “serious correction” zone, which they describe as a retreat of 15% to 20%.
Pullbacks 1950-Present
Pullbacks Corrections Serious Corrections Bear
Cases 128 52 30 20
% N/A 41% 58% 67%
Pies thinks it makes sense for investors to hold off on reinvesting until Friday, when the S&P 500 flirted with its 200-day moving average once more.
Pies and his colleagues created a checklist to help their clients make decisions, which they claim has previously assisted in determining if a downturn is “buyable,” or not.
Seven criteria are included in their list: the distance from a recession; the S&P 500’s trading position in relation to its 150-day simple moving average; the percentage of the index’s constituents trading above their respective 200-day moving averages; the index’s price-to-earnings ratio; the yield differential between 2-year and 10-year Treasury notes (BX:TMUBMUSD02Y and BX:TMUBMUSD10Y); the level of the Cboe Volatility Index VIX; and, lastly, the current 10-year yield.
The list above illustrates how unfavorable the market conditions are at the moment. The Treasury yield curve is relatively flat, the S&P 500 has surpassed its 150-day average, values appear stretched (though Pies and his team think the valuation signal may not be as significant this time around), and the index’s depth is weak.
Pies stated that only three of the seven requirements had been satisfied as of Thursday’s closure. Yields have decreased, providing some stability to the economy. The VIX has not risen beyond 25. Most importantly, Pies and his group do not anticipate a recession in the near future.
For this reason, Pies would suggest holding off for another month or so until the market hits a bottom that can be purchased. As investors prepare for the upcoming Federal Reserve meeting, which ends on March 19, and the annual drain on banking-sector liquidity that usually takes place ahead of the April U.S. tax-filing deadline, he anticipates that the market volatility that has gripped markets over the past few weeks will likely continue into March.
Pies stated in a story released by MarketWatch that “clients who followed our guidance to reduce risk earlier in the year should look to add back exposure over the next couple of months… but not quite yet.”
Pies was one of only a few Wall Street strategists who predicted that early in 2025, investors may be spooked by a growth panic.
Individual investors, in particular, have excitedly purchased every dip so far in 2025, according to data from J.P. Morgan Securities. Regretfully, investors who adopted this approach may have acted too quickly.
Pies did the math and concluded that the “golden era of dip buying” was the time frame from the conclusion of the 2008 financial crisis to the stock market top in late 2021.
Just 30% of pullbacks from 2009 to 2021 progressed to corrections or worse.
What is the most significant difference between today and the time following the financial crisis? Pies claims that the “Fed put” has been eliminated from the market due to persistent inflation. Dip purchasers had peace of mind prior to 2022 because they knew that the Fed would quickly intervene if the market had a severe crisis.
That is no longer the case in an era of above-target inflation, while Pies said that given that rates have dropped in tandem with stocks, the recent downturn appears to be a reversion to the “golden era” days. Since bond rates and prices move in the opposite directions, the decline in yields has assisted in protecting balanced portfolios from some of the equity market’s pain.
Despite key indexes recovering from early losses and closing higher, U.S. stocks were on course to finish their worst week since September on Friday.
The selloff has been mostly attributed to uncertainty regarding the economic fallout from President Trump’s most recent tariffs. The weakness of the market as a whole has been partially attributed to the unimpressive earnings of companies that are crucial to the artificial intelligence trade.
