A Strong Economy Can Still Have a Falling Market

This week took me to Tokyo and Atami for the fireworks, with an occasional eye on US equities along the way. In What Would Change My Mind?⁠, published on 30 September 2026⁠, I outlined the possibility of a correction between the fourth quarter and the first quarter of next year. The recent decline is moving in that direction, although it neither confirms the full forecast nor means the adjustment is over. My working view remains that this is an early stage of the correction, with room for sharp rebounds along the way. Mid-to-late November is the first window to watch, potentially extending into December. A test of the S&P 500’s 50-week simple moving average is one scenario for where a low could develop.

the S&P 500’s 50-week simple moving average (purple) is one scenario for where a low could develop.

That assessment rests on an economy that remains resilient. October’s unemployment rate fell from 4.2% to 4.1%, nonfarm payrolls increased by 165,000, and labour force participation also rose. These figures do not yet suggest a broad deterioration in employment. That supports household spending and business revenue, but offers less comfort to investors hoping for rapid rate cuts. While inflation pressures persist, a steady labour market gives the Fed room to keep rates elevated. Companies can continue making money while investors become less willing to pay the same multiple for those earnings, particularly when bonds offer more competitive returns. Expecting a stock market correction is therefore consistent with believing the economy remains strong. For now, the base case is a valuation adjustment under higher interest rates; a recession-driven selloff is a risk to monitor.

Previous midterm election years offer context, but no fixed timetable for a bottom. The 2014 pullback reached its low in October. In 2018, the decline from the September peak lasted roughly fourteen weeks, ending on Christmas Eve. The 2022 low came in October, before the election, after a bear market that had already been running for much of the year.

This time, the 50-week moving average is a reference point. Whether it provides support will depend on the interest-rate, inflation and employment backdrop when markets reach it. Steady employment, alongside easing pressure from oil prices and long-term Treasury yields, would strengthen the case for a correction the market can absorb. A sustained rise in unemployment, or inflation that forces further tightening, would require reassessing how deep the decline could go. The next task is to distinguish a market adjusting to a higher cost of capital from an economy beginning to weaken.

These are personal market observations and do not constitute financial advice (NFA).