Top Reasons Why the S&P500 Could Enter a Months-Long Correction

S&P500 correction

The media had been covering the latest S&P500 200+ points drop during the past two days and a lot of reasons had been associated with the move, starting with uncertainties around the election, no resolution in terms of the new government spending bill, as well as extreme valuations are compared to the fundamentals. However, two days of price action developments can’t communicate a lot, so we would like to make you look at the long-term and anticipate what are some of the triggers for a longer market correction.

# Looming Presidential Election

Considering the 2016 US Presidential election showed that polls can be misleading, a lot of uncertainty clouds the next three months, until the November 3rd results will be obvious. Even though a Democrat or a Republican in the White House will not make major changes in terms of government spending (and that’s supportive for the markets), foreign policies and priorities in terms of domestic issues can make a difference.

# Weakening underlying fundamentals

Even though the S&P 500, alongside the Dow Jones Industrial Average, are considered to be indicators for the broad US stock market, in reality they reflect how a number of big companies are performing. The rally in the past several months had been fueled by tech and healthcare stocks, two of the sectors that had been benefiting from the economic show generated by the COVID-19 pandemic.

This had pushed fundamentals to extreme levels, and now tech P/E ratios are near of at the bubble peak. Combined with a weak economic recovery, we should expect to see at least a minor adjustment process to take place.

# Disappointment related to a COVID-19 cure

Each time positive news related to a COVID-19 cure came up, the S&P500 surged. Now we’re in a position where all the enthusiasm had been mostly priced in and there a lot of room for disappointment. Despite the positive early data, it is important to note that no vaccine or therapeutic had passed all the requirements for mass distribution. Some experts believe that’s a 2021 even, so in the meantime, the virus could have a meaningful impact on economic activity.

# Poor technical position of the index

After surging from 2,200 all the way to 3,580 the S&P500 performed above even the most optimistic expectations. That is putting the index in a very bad technical position, raising the probabilities for a corrective move lower. If in March we had all the conditions required for a market bounce, not everything seems to be favoring some selling.

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