The market’s advance in 2025 — beginning from the Liberation Day tariff-induced bottom — has been very impressive. Not only in its magnitude, but in its lack of breaks or pauses during the journey. Even minor periods of weakness were quickly bid back up as the buy-the-dippers took advantage of a slight discount.
Now, however, with the S&P and TSX trading below their respective 50-day moving averages for the first time since April, the question is whether this is just a bigger dip or the early days of the correction that so many have been waiting for.
Naturally, as soon as the market wobbled a bit, headlines were quick to fill with bearish commentaries. A report that two large U.S. banks called for a 10-20% correction certainly attracted a lot of eyeballs. But it’s worth pointing out that the timeline was for over the next 12-24 months, and given that the S&P 500 has had about 25 corrections over the past 50 years, that outlook is actually the long-term average.
Another headline noted that Warren Buffett took $6 billion out of the market. That isn’t really news as Berkshire has held a mountain of cash for a long time, but it’s not like it’s a new market timing call.
As for the famous hedge fund manager that has piled on puts in a few AI-related names…it’s a bearish-positioned fund, they have been bearish pretty much all the time.
Just trying to highlight the dangers of headline scrolling. The world wants to grab your attention, but headlines often lack context. It’s even harder now that many are relying on large language models to summarize.
A headline yesterday read “US companies announce most October job cuts in over 20 years”…sounds really bad, eh? But why should we only look at October data? Attention grabbing: yes; insightful: less so. There was an uptick in job cuts, which is somewhat concerning but not as alarmist as the headline reads.
That being said, there is some evidence supporting that this could be the start of an actual correction. The market has run pretty far and very smoothly, so we could just say its due. But that is a pretty lame argument.
Of greater concern has been breadth. Breadth measures how many members of an index are participating in its advance or in its decline.
The breadth has continued to narrow because market leaders have narrowed to the megacap tech names. That makes this market advance very sensitive to variations in excitement around AI. There are many on both sides of this: how transformative, actual returns on investment, etc.
Regardless of the debate, the news flow on AI appears to be a large determinant of market advance or decline. Based on Google Trends, the topic of AI appears to be softening a bit. Perhaps this is contributing to the market softness. This market attention could shift to the economy, inflation, or even the government shutdown. But, for now it appears this is an AI-driven market.
It’s also hard to tell if the buy-the-dippers are alive and well. Based on ICI data, the biggest equity fund and ETF inflow this year occurred during the week of April 9. That was the week when markets really got hit with tariff uncertainty, so great job, investors, for buying that dip!
Briefer and shallower periods of weakness since then appear to have elicited selling, not buying. Late May, early August, mid October are the three previous blips that either saw selling or certainly not inflow buying. Maybe the drops were not big or long enough to motivate this investor cohort; we may find out shortly as the current weakness is a bit more substantial.
So here we have a market breaking below its 50-day moving average, all the bearish folks garnering the headlines, a market with poor breadth that is dependent on AI excitement, and a less enthusiastic dip-buying investor.
The good news is we have a global economy that is decent, perhaps even improving. The Citigroup Economic surprise indices have been moving higher, possibly implying the economic data is better than expected. Less risk of recession means if this does turn into a correction, there could be less of a chance it becomes a grinding bear. Still, it would be nice to have some more U.S. economic data, which is spotty given the ongoing government shutdown.
Speaking of the shutdown, we have had a pet theory going for a while that pain suffered by the general population wouldn’t precipitate an end to the shutdown. It would last until the equity market showed a decent amount of weakness. The S&P is now off 4% from its high, maybe the line the sand is at 7% or 10%? Just a theory.
Final Thoughts
Try and avoid doomscrolling financial headlines. It feels like when markets are down, they tend to be more negative and when markets are up, they’re more positive. It’s a type of confirmation bias that helps attract more eyeballs. When it comes to investing, there are well-researched or educated views, but the future is unknown. Have a view but also have a few different plans.
It would not be much of a surprise if this became a correction. We would look for investor sentiment to turn bearish; for defensives, such as consumer staples and health care, to outperform the broader market; perhaps bond yields decline; and for the put/call ratio to spike, alongside US dollar strength—to mention a few of our correction-monitor signals. If enough provide a signal, and the market is down a more meaningful amount, our economic view remains that we’re at low near-term recession risk.
We may have that second buying opportunity of 2025.We may not be there yet. Global equity markets are down 3-4%, and this is mildly interesting but not interesting enough. It could very easily snap back positively next week on some AI news or perhaps government shutdown news.
For now, we sit patiently with a mild defensive tilt in positioning and a well-diversified defence. If a correction develops, be ready to act. And be equally happy if it doesn’t and we all enjoy a Santa Claus rally. Although we do think Santa already came really early this year.
— Craig Basinger is the Chief Market Strategist at Purpose Investments
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