The S&P500 (NYSEARCA:SPY) saw a 1.9% drop from highs of Wednesdays trading to the market open on Thursday. The sell off happened after the Fed minutes indicated that officials felt employment numbers could be reached this year, which would lead to a decrease in the support for the economy.

Recovery from March lows

The market sell-off surrounding pandemic concerns from mid-February 2020 to mid-March 2020 saw the S&P500 drop about 35%. That loss was recovered by mid-August 2020, when the index regained its all-time high of nearly $340. But this week, we saw the S&P500 clock a 100% move from these lows, the strongest bull market rally since WWII. This move has been fuelled by an influx of money into the economy, with many industries seeing great returns alongside the market.

Fed minutes

Officials were split on how to adjust their monetary policies as we move away from the pandemic crisis. Issues about when the bond-buying “taper” would start and a what pace was one debate that went on, as well as what the biggest risks to a recovery are. They spoke about inflation, unemployment and the possibility of a reversal in conditions due to the new variants. What was agreed on is that the central banks emergency purchases of Treasury bonds and mortgage-backed securities would be decreased.

Market reaction

As mentioned earlier, SPY saw a decline of 1.9% as fear entered the market. Most notably was the energy sector retreating -2.4% and the healthcare sector -1.46%. Buyers came in this morning to offer some support at around $436 of the S&P500 ETF. If this does not hold, $431 shows as support, which would be a 3% drop from the news. $422 was a level of support when the market corrected on the 19th July, and this would be 5%, a correction size not experienced this year.

Chart provided by TradingView

August is a seasonally weaker period for the markets. So, the combination of the Fed news and general concerns about an over extended market could see a greater correction ahead.

Long term

The long term view is that the market will always be making steady returns. The average return is around 10%, multiples above a return you would make from leaving money in the bank. Total returns can be even higher when factoring in dividend payments. I often hear the expression “time in the market beats timing the market”. But why not do both? If levels drop lower than today, we could see a great entry area to add into the market that would provide both short term and long term gains.

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