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It’s been a while since the S&P 500 had a big pullback—and that could mean rocky times ahead

August 17, 2021, 7:07 PM UTC

Stock market investors have enjoyed quite a remarkable run since last March. In fact, as of Monday, the S&P 500 had doubled from its pandemic lows.

But that massive rebound has also been, in large part, remarkably calm.

“The S&P has now gone 196 trading days without a 5% pullback (the fifth longest streak in 50 [years]) and is on track for a near-record number of all-time highs in 2021,” analysts at Bank of America wrote in an equity derivatives report on Tuesday.

Yet that calmness may itself be a warning sign: “History suggests to tread carefully from here, as some of the largest fragility shocks have been preceded by similar episodes of extreme market steadiness,” the analysts wrote. Indeed, the “two longest streaks without a 5% pullback in the S&P built up to the fragility shocks of [August 2015] and [February 2018],” they noted (see their chart below).

“In a similar vein,” the analysts added, “2017 was the year with most all-time highs in the S&P since the [Great Recession], and [February 2018] was the third largest fragility shock in the S&P since 1928.”

But for those like Lindsey Bell, chief investment strategist at Ally Invest, “it doesn’t bother me that we haven’t gotten a pullback yet,” she tells Fortune. There’s still plenty for investors to be optimistic about in the market right now, she argues, including a resilient consumer and strong corporate earnings. And according to Bell, getting a correction (a 10% selloff) in this environment “might be a little bit more difficult than we think, because there’s still a lot of money in the marketplace, there’s a lot of liquidity out there, and people are putting their cash into the market when they see some sort of opportunity,” she told Fortune earlier in August.

But the Bank of America analysts note that “stability breeds fragility,” especially when central banks suppress risk in the market and prompt investors to turn to “low conviction, momentum-driven positions,” and then those central banks “turn less accommodative, a prospect that is now upon U.S. investors.”

Meanwhile, seasonality may also factor into the equation: August is historically a rougher month for investors, while September tends to be even worse. And given the market’s calmness and massive rally from pandemic lows, LPL Financial’s Ryan Detrick and Jeff Buchbinder argued “the odds are much higher” for a 5% to 8% pullback in the “historically troublesome August/September/October period,” in a July 26 note. But that “isn’t a bad thing though,” they added, “as some type of break could be necessary before another move higher.”

What to watch, Bank of America analysts suggest, is Federal Reserve remarks at the Jackson Hole conference at the end of the month; August payroll data (in September); and the upcoming Federal Open Market Committee (FOMC) meeting “for potential catalysts.” Still, they warn a shift could come at any time: “Fragility can also be triggered by seemingly innocuous events when they reach a point of high instability.”

So far on Tuesday, it seems markets are feeling a little unstable: The S&P and Dow were both down nearly 1% in afternoon trading.

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