3 Things That Could Send The S&P 500 Down 20%

After six consecutive months of gains, the SPDR S&P 500 ETF Trust SPY is on quite a roll heading into the end of the year. But just because the U.S. economic outlook is improving, it doesn’t mean there aren’t real risks lurking that could derail the rally in the next several months.

Sevens Report Research's Tom Essaye recently discussed the market landscape and factors that could improve or worsen the outlook for stocks in the near term.

The State Of The Market: The consensus expectations for the Federal Reserve monthly asset purchasing is that the Fed will announce a plan for tapering sometime in August or September, Essaye said.

He expects the Fed to slowly take its foot off the gas with monthly asset purchases starting around the end of 2021 and end its quantitative easing completely by mid-2022.

In addition to uncertainty surrounding Fed action, U.S. COVID-19 cases are on the rise thanks to the delta variant. Yet Essaye said governments are not imposing lockdowns at this point, and consumers don’t appear to be changing their behavior in a meaningful way.

Finally, Essaye said recent inflation numbers have remained elevated but steady, in-line with the Fed’s predictions and providing reassurance to investors about the near-term dangers of hyperinflation.

Related Link: How Much Of An Impact Could The US COVID-19 Delta Surge Have On Stocks?

3 Factors To Watch: Looking ahead, Essaye said a more gradual Fed tapering plan, a peak in new COVID-19 cases and positive economic growth with minimal inflation are all factors that could keep the S&P 500 on the path to new highs. He named three factors that could potentially disrupt the market’s bullish run in the near term:

• The Fed implies tapering could begin sooner than expected or be more aggressive than anticipated.
• COVID-19 cases continue to rise and trigger lockdowns or reduced consumer spending.
• Economic growth stalls and inflation rates continue to rise.

Essaye said one of these three outcomes could be enough to stall the S&P 500, but two or more could create significant market volatility.

“If two of these events occur, then we’re looking at the possibility of a 10%-20% correction,” he wrote.

Benzinga’s Take: Of the three possible bearish factors Essaye mentioned, the third one seems the most scary in terms of potential lasting negative impact. Any market sell-off based on Fed tapering or COVID-19 shutdowns would likely be temporary and could provide a similar buying opportunity for long-term investors to the one that occurred during the initial COVID-19 sell-off in March 2020.