Investors may be thinking it’s finally time to take a breather after the stock market recovered its recent 8.5% loss over the past few weeks.
But Jeffrey Buchbinder, chief equity strategist at LPL Financial, says not so fast.
Back in July, Buchbinder sensed the market was ripe for a correction, writing in a note that “the pullback is overdue” and predicting a decline in August. After disappointing July jobs and ISM manufacturing reports, the market turned lower, extending the sell-off that began in late July after the Bank of Japan unexpectedly raised interest rates.
Now Buchbinder predicts another pullback is coming, 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 best deals when it does.
A September correction is expected
There are several signs pointing to an impending correction in the coming weeks, according to Buchbinder.
First, discounts of 10% or more are quite standard, even under normal economic circumstances. Buchbinder calls them “garden variety corrections.”
“We’re more likely than not to get a crunch,” Buchbinder said. “Even in a positive year, the average maximum absorption is 11%. We already have 8.5%. This is unlikely to be the worst absorption of 2024 based on history.”
There are also elections coming up later this year, which Buchbinder believes will add further volatility to the market. He pointed out that historically the market has experienced declines before elections. Increased geopolitical uncertainty in various parts of the world, such as Europe and the Middle East, can also make markets restless.
Stocks also tend to underperform in September overall. While there’s no clear reason why this month in particular was the worst performance for the S&P 500 since 1950, one theory is that investors like to rebalance their portfolios before summer ends.
“September is a very weak seasonal month, so the next three weeks would be a logical time,” Buchbinder said.
A correction but no recession
If that sounds alarming, don’t worry—Buchbinder emphasizes that while pullbacks are happening, he still believes the U.S. economy is headed for a bull market.
“To get a bear market, which would mean a 20% drop, you really have to have a lot of evidence of a recession or certainly a major financial crisis, and we don’t see any signs of either,” Buchbinder said. The market may be going through some volatility, but Buchbinder believes the underlying market fundamentals are strong — and they’re improving as the market expands.
Buchbinder believes the S&P 500 will end the year close to its current level. He also doesn’t rule out the possibility of a year-end market spike: In a blue-sky scenario, an AI tailwind, continued strong corporate earnings and a post-election rally could lift the index by several hundred points.
“The road there is probably still going to be bumpy, and again, it’s probably going to take a really strong rally in the fourth quarter,” Buchbinder said, adding that “post-election rallies are very common.”
How to buy the dip
Buchbinder shared the following four recommendations should a September withdrawal occur.
Overall, Buchbinder is neutral on the stock, but believes investors should take advantage of the downturn to buy certain areas of the market at an attractive price.
Buchbinder likes it industrialists and sees this area as much more reasonably valued than the tech sector. While not as hyped, Buchbinder points to favorable tailwinds for industrial companies. Nearshoring is on the rise as companies move jobs closer to the US, and the possibility of a Harris victory would mean continued spending on green energy infrastructure.
In terms of size, Buchbinder prefers large caps above small, despite the small-cap resurgence earlier in July. In a late stage of an economic cycle like the one we’re in now, Buchbinder believes larger companies are better equipped to withstand slowing growth.
Across the ocean, Buchbinder also likes Japan and emerging markets outside of China. He sees these two areas as beneficiaries of the Fed’s rate cut, as a rate cut would build confidence in US economic resilience and increase inflows. While yen trading has added some volatility to Japanese stocks, Buchbinder believes the Japanese economy will perform well in the long term as consumer spending picks up and Japanese exporters do well. China will continue to be a difficult 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 Industrial Select Sector SPDR Fund (XLI)on Vanguard Large Cap ETF (VV)on iShares MSCI Japan ETF (EWJ)and WisdomTree Emerging Markets ex-China Fund (XC).