Though the AI leader left some investors wanting a little more, Nvidia seems to have provided earnings just enough for Wall Street to advance, so things are off to a good start.
However, we’ve also heard billionaire investor Paul Singer caution against the stock market’s complacency and risk, while others discuss the stock market’s deteriorating mood.
Friday’s 1.7% decline spurred by soft data has been the weakest day for the S&P 500 so far this year. Could things grow worse? There is only one response to our call of the day from Piper Sandler’s chief investment strategist and head of portfolio strategy, Michael Kantrowitz.
In a podcast about that study, his team examined all 27 corrections of 10% or more for the S&P 500 since 1964, as well as the three main causes of those corrections.
They also discovered that macro events typically result in the largest declines. “There is clearly cause for concern today, and it isn’t necessarily because the market is in danger right now. Rather, investors are generally optimistic about the state of the economy and the stock market. The S&P 500 has had two successful years, and there is a lot of anticipation for the new administration and the possibility that [Fed Chair Jerome] Powell may implement a couple more rate cuts this year,” Kantrowitz stated.
A crowded market and some earnings disappointment are now among the bearish talking points, and the dangers are “mainly centered around the new administration’s policies and the risks that those may come with.” He added that tight credit spreads and high valuations are further hazards.
According to him, those are prerequisites, but a catalyst is still required.
Prior pullbacks were triggered by a number of factors, including “a global exogenous shock” for five, growing unemployment for eight, and steeply rising interest rates for fourteen. The last catalyst is a conglomeration of numerous, more unpredictable events, such the 2011 downgrading of the U.S. debt. Even so, he continued, once those problems were fixed, the market fell after those five incidents.
Kantrowitz examined more recent history and pointed out that all of the corrections from the late 1990s to 2018 “were all growth-driven market corrections.” Since 2022, there have been two selloffs caused by interest rates, he added, with equities declining as rates rose and markets finally plunging at the height of interest rates.
He adds that markets might remain pricey or concentrated until something happens, even though the chart of those 27 suggests that a correction occurs around every two years. History makes it abundantly evident that interest rate increases or recessions are the primary causes of all of these corrections. When examining the corrections in these 27, valuation is wildly inconsistent. At times, such as in 2000, the markets were extremely costly, while at other times, they were incredibly cheap.
He is generally optimistic about two of the three possible catalysts for a 10% fall this year. “With today as a backdrop, if I was a betting man I’d say there’s a higher probability than normal that something unexpected could happen that is not a function of high rates or a lot of people losing their job i.e., recession,” he stated.
Minor growth scares have occurred over the past 12 months, and he believes that interest rate and inflation fears will continue to drive a large portion of market volatility. “The risks to markets are when investors get really concerned about interest rates and inflation and not a growth scare,” according to him.
“The economy is too strong, and when the 10-year yield rises above 4.5%, the market gets shaken up, but the turbulence doesn’t last very long,” the expert said, expressing optimism about averting a fall this year.
