Stocks have risen higher to start the month, but one strategist warns there could be a correction on the horizon. Here’s why.
May has gotten off to a good start.
Stocks rose on the first trading day of the month and have marched higher in the days since. On Thursday, the Dow set a record close of 34,548.53, while the S&P 500 and Nasdaq gained 0.8% and 0.4%, respectively.
The gains came after a better-than-expected jobless claims report for last week, with the Labor Department reporting a reading of 498,000 initial claims – setting a fresh pandemic-era low.
And the positive report came just a day before the April jobs report, which is expected to show new payrolls of around 1 million and an unemployment rate of 5.8%.
But while the market is likely to end the first week of May higher on the jobs news, one expert warned this week that this will be a bumpy month for socks.
“Growth was actually taking a bit of a leadership role over the last month or so as Treasury yields came down from that 1.75% level down to sub-1.60% today,” said Mona Mahajan, senior U.S. investment strategist at Allianz Global Investors. “I do think at this point investors are really considering that perhaps we’re at the start of a reversal of that move.”
Mahajan points out that a rise in rates is being propelled by a fully reopened economy coming this summer, continued stimulus, and the Fed on the sidelines while inflation rises, and could push the 10-year yield back above 1.7%.
“We’ve really been in a low-rate environment for 10 years now since the great financial crisis,” Mahajan said. “It really does push investors out of the risk spectrum. So, in this case there is no alternative except to own equities when rates are so low. However, if we’re not facing an environment where 10-year yields go back up not only to the 1.75% range but back to 2%, 2.25%. investors really may have an alternative to equities.”
“That actually does put downward pressure on areas like technology and growth, which are considered somewhat longer duration assets,” Mahajan said. “Also puts some pressure on some of the bond proxy sectors like REITs and utilities, as well.”
But tech, growth, REITs, and utilities aren’t the only areas of the market that Mahajan expects to see come under pressure, and she warns the market as a whole is likely to see a pullback.
“The markets have been running quite nicely since November of last year—which was election period, which was vaccine rollout period—and we haven’t had one 5% or 10% correction yet,” Mahajan said. “In any given year, we tend to see one to three corrections in the broader S&P 500.”
In addition to a possible correction this month, Wells Fargo Securities’ Chris Harvey says a powerful rotation out of tech could happen as soon as this month, and said now is the time to take profits on big tech holdings.
“Take some profits,” Harvey said. “It’s not that we hate tech. It’s just some of the tech companies are high growth, high risk, [and] high multiple.”
“We are just beginning a very aggressive GDP cycle, a very aggressive recovery,” Harvey continued. “Typically, when you have growth and growth is abundant, you don’t want to pay a premium for tech. That’s where we are right now.”
“We’re going to start thinking about things like higher taxes,” Harvey added. “When do we taper? How high do rates go – assuming they go higher. You can get a bit more choppiness.”