S&P 500 at Risk of Third Quarter Correction on Weak Economic Data
The S&P 500 is less than one percent away from a new record, but there are growing concerns that the broad-based index could lose 10% of its value in the third quarter, and officially, send it into correction mode. The reason? Persistently weak economic data. Not even a resolution of the trade war between the U.S. and China and dovish Federal Reserve will be able to stop a potential correction in the third quarter.
Investor optimism has helped propel the S&P 500 to record levels in 2019. In the first quarter, the S&P 500 returned its largest quarterly gain since 1998, advancing 14.5% At the start of the second quarter, the S&P 500, NASDAQ, Dow Jones Industrial Average, and TSX all closed at record highs.
That optimism took a hit in May though. Rising tensions between the U.S. and China, President Trump threatening tariffs on Mexico, and strong bond-buying—which pushed U.S. Treasury rates lower, took the wind out of the S&P 500. The index ended the month 6.6% in the red, wiping out $4 trillion in market value. It ended up being the worst May on Wall Street since 2010 and second worst since the 1960s.
In June, the markets rebounded, thanks in part to President Trump deciding to put tariffs with Mexico on hold. The Federal Reserve also hinted it will not raise rates and could even lower rates. A potential end to the trade war between the U.S. and China is also giving investors hope.
All of that might not be enough to stave off a third quarter 10% correction on the S&P 500. A stock market correction is often defined as a decline from recent highs. A “bear market” on the other hand occurs when the markets retrace at least 20% from recent highs.
Data Does Not Back Up Record S&P 500 Highs
Optimism may help propel the markets higher, but eventually, economic data has to figure into those nosebleed valuations. Expect the S&P 500, TSX, and other indexes to correct in the third quarter on concerns of weak earnings projections, lower consumer sentiment, and the sale of single-family homes being down.
The yield curve is also inverting. The 10-year yield, which is partly responsible for setting the rates on mortgages and corporate loans, is at its lowest level since November 2016. The global economy is also showing persistent signs of weakness.
What kind of exposure can investors take in light of a stock market correction? You can already see that investors are getting worried about a third quarter correction on the S&P 500. Gold, a safe haven investment has soared over the last few weeks, up more than 10% since late May; breaking through resistance at $1,360 and at a six-year high. Bitcoin and other cryptocurrencies are also on the rise. Meanwhile, the Invesco Defensive Equity ETF (NYSE:DEF), is up 22% in 2019 and has advanced 6.5% in June alone.
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