The major North American stock market indexes are all near record highs, but they have been trading in the red over the last few days. This has raised concerns that equities are on the verge of a stock market correction, which is typically defined as a drop of at least 10% from the most recent stock market highs.
Fears of a stock market correction are looming not because of a coming recession or earnings misses. It’s because the broader markets have been on fire since bottoming on March 23, 2020.
Are North American Stocks on the Verge of a Correction
As of this writing, the S&P 500 is up 77% since last March, the Dow Jones Industrial Average has rallied 72%, the Nasdaq has surged 107%, and the TSX has advanced 64%.
For many investors, that’s just too much of a good thing.
When a stock market correction or pullback does happen, it is not expected to be exceptionally large or last very long. That’s because there are record levels of cash on the sidelines. On top of that, there are a lot of investors who regret not getting on the massive stock market rally over the last nine months. In 2020, more than 10 million new brokerage accounts were opened. And, with interest rates near record lows, there is nowhere else for investors to park their money.
A stock market correction then will probably be met with a buying frenzy.
Again, the correction or stock market pullback will most likely be short lived, but the chances of stocks surging considerably higher in the near term is also in question. Because of record cash levels and low interest rates, inflation is becoming a concern.
Higher costs of goods, which if you’ve been to the grocery store lately, you know is already happening in Canada, could put a dent in spending and investing. If inflation gets too hot, the Bank of Canada and Federal Reserve could be forced to raise interest rates, which has a history of derailing and stock market momentum.
What Stocks Are Most Vulnerable to a Stock Market Correction?
Some stocks will be more vulnerable than others during the next stock market correction. Because of the coronavirus, a large number of U.S. states and parts of Canada are still in lockdown. Discretionary stocks, like restaurants, traditional brick-and-mortar retailers, hotels, and travel, which have rallied since March, could experience a big decline. So too could consumer staple and utility stocks.
2020 was also a record year for initial public offerings (IPO). And investors afraid of missing out jumped on the bandwagon. The average first-day return for IPOs in 2020 was 41%. A stock market correction could see many high-flying IPOs give up a lot of ground.
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