Investment strategists at Piper Sandler have identified the three main triggers for stock-market corrections, shedding light on what could potentially cause the next double-digit pullback in the S&P 500.
According to the team led by Michael Kantrowitz, market corrections are typically driven by rising unemployment, rising bond yields, or global exogenous shocks. The team analyzed the 27 corrections of 10% or more for the S&P 500 since 1964 and found that each correction was primarily caused by one of these factors.
Currently, rising bond yields pose the biggest threat to tranquil markets, with the most recent correction ending on Oct. 27 with the S&P 500 down 10.3%. Equities have shown sensitivity to higher yields, reaching near-record levels last seen near the peak of the dot-com bubble. This suggests that stocks could react negatively if long-term bond yields continue to climb.
However, a modest rise in unemployment could actually help sustain the rally by guarding against higher yields. When the economy weakens, bond yields often fall as demand for defensive assets like bonds increases.
Despite the recent increase in Treasury yields, expectations of robust economic growth boosting corporate earnings have helped shield stocks. The S&P 500 has risen 9.4% since the beginning of the quarter and 26.7% since the last correction, closing at 5,218.19 on Monday.
The Nasdaq Composite is up 9.6% since the beginning of the first quarter, while the Dow Jones Industrial Average has gained 4.5%. The yield on the 10-year Treasury note has also increased since the beginning of the year.
As investors keep a close eye on rising bond yields and potential triggers for the next correction, the market remains cautiously optimistic about the future. Stay tuned for updates on how these factors may impact the stock market in the coming months.
