Seasonality and bearish sentiment could create an opportunity for investors next month — but policy uncertainty remains
Referenced Symbols
COMP -1.98%
SPX -1.07%
DJIA -0.46%
The stock market’s sell off in March may have felt like a never-ending nightmare.
U.S. stocks are on pace to wrap up a dismal March, as the volatility that has recently gripped Wall Street has shown no signs of abating. Tumbling over 8% as of Friday afternoon, the tech-heavy Nasdaq Composite COMP -1.98% is headed for its biggest monthly decline since December 2022. The S&P 500 SPX -1.07% has slumped 6.3% in the same period — on track for its worst month since September 2022 — while the Dow Jones Industrial Average DJIA -0.46% is off 5.2% on the month, according to FactSet data.
The sharp selloff has come as President Donald Trump has ratcheted up trade tensions with America’s major trading partners. Earlier this month, Trump officially levied 25% tariffs against Mexico, Canada and China. Just two days later, the president confirmed the U.S. would pause tariffs on goods and services compliant with the United States-Mexico-Canada Agreement (USMCA) until April 2. The Trump administration has referred to that day as “Liberation Day,” when the president has promised to impose so-called retaliatory tariffs on all U.S. trading partners.
In the latest escalation of his trade war, Trump on Wednesday announced 25% tariffs on all foreign-made automobiles, which he said would take effect on April 3.
In turn, the Trump administration’s frequent shifts on its tariff policies have sent financial markets into a tailspin, leaving investors uncertain about the direction of trade policy and, more importantly, its economic fallout. The rapid selloff also pushed the Nasdaq and the S&P 500 into correction territory earlier this month — defined as a 10% decline from a recent peak.
The U.S. stock market briefly breathed a sigh of relief last week after the Federal Reserve maintained its forecast for two interest-rate cuts this year. But that optimism proved short-lived as markets quickly retreated after data showed consumer sentiment had worsened amid resurgent inflation fears.
“The first half of the month was an emotional selloff in the stock market that, incredibly fast, moved from record high to correction. Now what we’re seeing is confusion, and markets are going sideways,” said Mark Hackett, chief market strategist at Nationwide Investment Management Group.
“This looks a lot like the pendulum swinging way too far in one direction, and setting the stage for what I expect to be a recovery,” he told MarketWatch via phone on Friday.
April seasonality
To be sure, investors want to know how the sharp selloff in March sets the stage for April — one of the best-performing months of the year for U.S. stocks — and whether that strong seasonal trend could create more buying opportunities for investors.
History shows that, since 1971, April has been the second-best month of the year for the three major U.S. stock indexes, according to the Stock Trader’s Almanac. In postelection years since 1950, April has remained a top-performing month — historically ranking as the second-best month for the Dow and the S&P 500, and the third-best month for the Nasdaq (see chart below).
Extreme bearish sentiment creates buying opportunity
Other indicators also suggest most of the pain could be behind us. Investor sentiment, as measured by the American Association for Individual Investors, has reached extremely bearish levels, presenting “credible buying opportunities” for investors, Hackett said.
Bearish sentiment — the expectation that stock prices will fall over the next six months — eased to 52.2% for the week ending March 26, according to the latest reading from the AAII, from 58.1% the week prior. This is the third time in the history of the survey that bearish sentiment has exceeded 50% for five consecutive weeks.
In Hackett’s view, when sentiment has been this stretched, the S&P 500 has historically posted strong gains over the following six and 12 months.
The AAII’s investor-sentiment survey is considered a contrarian indicator for the stock market — suggesting that it may be a good time to go in the opposite direction of the herd. Extreme bearishness often precedes upward movement in the stock market; conversely, extreme bullish sentiment could be a cue to sell.
Disconnect between sentiment and economic data
It’s also worth noting that a clear disconnect still persists between consumer sentiment and economic data on consumer behaviour, making it harder for investors to read the actual state of the economy.
Economic data on Friday showed consumer sentiment in March fell to the lowest level in over two years, according to the University of Michigan’s consumer-sentiment survey. Meanwhile, personal spending still increased 0.4% in February, according to the personal-consumption expenditures (PCE) price index — but economists polled by the Wall Street Journal had forecast that spending would rise 0.5%.
Despite seasonal and contrarian tailwinds, what April holds for the stock market is still anyone’s guess, especially with President Trump’s April 2 tariff deadline looming. Investors hope that day could clear a fog of policy uncertainty that has clouded the stock market for months.
“Picking stock-market bottoms is very difficult. … If you add the April 2 tariff deadline, and the fact that we’re moving into earnings season, and the fact that a ‘V-shaped’ recovery for the stock market is fairly rare, those things tell me that we’re probably not out of the woods yet in terms of volatility,” Hackett said.
U.S. stocks tumbled on Friday, with the Dow falling over 700 points, or 1.7%, while the S&P 500 was off nearly 2% and the Nasdaq slumped 2.7%, according to FactSet data.