What causes Corrections?
Can we agree that many US stocks are overvalued? How about the S&P 500?
We’ve talked over the years that there are many ways to value “the market.”
For example, the S&P 500’s Shiller (CAPE) PE ratio of 40.7 is approaching levels last seen at the height of the dot-com bubble in early 2000.
https://legacywealthmgt.net/annual-cape-update-what-is-cape-and-why-it-is-important/
IF “something” bad were to happen, US stocks would get shellacked.
https://legacywealthmgt.net/lessons-from-history/
What might that “something” be?
The analysts at Piper Sandler looked at the root cause of the 27 stock market corrections of 10% or more dating back to 1964. Here are the results…
Most major US stock market corrections are caused by rising interest rates, rising unemployment (leading to a recession), or a combination of both.
Words of wisdom from Jared Dillian: “In our current situation, it will probably be a correction that causes a recession rather than the other way around. As for interest rates, they’re probably headed a lot lower once President Trump installs a new Fed chair in May. But that could spark another round of inflation, forcing the Fed to reverse course and raise rates. That or some black-swan event seem like the two most likely culprits of a stock market sell-off to me. The second half of the year should be interesting.”
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