3 reasons the stock market is poised for a near-term correction, according to LPL

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  • The S&P 500 has hit 22 record highs so far in 2021 as investors anticipate strong economic growth ahead.
  • But the market is due for a pullback in the near-term after such a strong run higher, according to LPL.
  • Detailed below are three reasons the stock market is poised for an imminent correction, according to the firm.
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A stock-market correction could be imminent, according to a Friday note from LPL’s chief market strategist Ryan Detrick.

The S&P 500 has been on a tear so far in 2021, hitting 23 record highs as investors anticipate strong economic growth amid a full reopening of the economy. The S&P 500 is up more than 10% year-to-date, and has surged more than 80% since it bottomed on March 23, 2020.

In the long-term, Detrick believes there’s plenty of room for the current bull market in stocks to run higher, but in the short-term, Detrick sees reason for pause. 

A correction in the stock market from current levels makes sense for these three reasons, according to LPL.

1. Strong economic data flashes contrarian sell signal. 

With the economy roaring back from the COVID-19 pandemic, a peak in business activity could present a contrarian sell signal, according to Detrick.

Manufacturing PMI data hit its highest level since 1983, while Services PMI data hit an all-time high. But after such peaks were hit in the past, the stock market stalled out over the following three and six months with flat or negative returns, Detrick said. 

LPL

2. Stocks are priced for perfection. 

With a stock market at record highs as the economy continues to recover, “stocks aren’t cheap,” Detrick observed.

The forward price-to-earnings ratio of the S&P 500 currently sits at its highest level since the late 1990’s, which was just prior to the dot-com bubble bust.

“This doesn’t mean a new bear market will start tomorrow just because multiples are as expensive as they’ve been since the late ’90s, but it does say things are priced close to perfection,” Detrick explained.

Any negative economic or COVID-19 data could lead to a correction in the stock market and increased volatility, Detrick said.

Read more: BTIG identifies 14 beaten-down stocks poised to dominate the market this earnings season and extend their track record of crushing expectations

LPL

3. Weak seasonality and a comparison to the 2009/2010 bull market. 

The worst six-month period for stocks is right around the corner, as the “sell in May” period is just a few weeks away, Detrick highlighted.

Meanwhile, “the S&P 500 during the current bull market is nearly tracking the 2009/2010 bull market to a tee,” Detrick said. If the current bull market continues to follow the 2009/2010 bull market playbook, a 16% correction could ensue.

“We aren’t saying there will be a 16% correction this time, but we are saying after an 80% move in just over a year, let’s be realistic that some type of volatility could be in the cards,” Detrick concluded.

LPL