Considering that the widely followed index has averaged an 11% total return, including dividends, over the past 40 years, this is a solid performance.
However, the past week has been topsy-turvy for the stock market, with volatility retuning in a big way.
Right now, there are no shortage of catalysts that could send the S&P 500 over the edge for its first crash or correction since the pandemic began.
But with each new variant of COVID-19, the potential arises for additional lockdowns, restrictions, supply chain concerns, and a possible decrease in consumer or corporate spending.
For what it’s worth, the delta variant’s emergence in May led to a short-term market hiccup that was fairly quickly put in the rearview mirror.
The problem with inflation is that it has the potential to sap consumer and enterprise buying power.
On the other hand, if crude prices tank on fears of another variant, it can hurt job creation in the energy sector and even reduce overall confidence in the U.S.
In other words, the oil market needs to provide some semblance of stability over these next three months.
This is to say that interest rates have been kept at or near historic lows, which has allowed growth stocks to borrow cheaply in order to hire, acquire, and innovate.
But with inflation soaring, the Fed is going to have no choice but to eventually raise interest rates and begin slowing its bond-buying program.
If we reach the debt limit without a deal in Congress, the Treasury Department wouldn’t be able to borrow.
To be clear, this isn’t the first rodeo for lawmakers when it comes to a debt-ceiling standoff.
Generally speaking, margin debt — the amount of money borrowed from a broker with interest to purchase or short-sell securities — is bad news.
While it’s perfectly normal to see nominal outstanding margin debt grow over time, the speed of its increase in 2021 is very alarming.
There have only been three instances since 1995 where margin debt surged over 60% in one year, according to analytics firm Yardeni Research.
In the latest report, the nation’s central bank examined the possibility that young investors putting their money to work in meme stocks like AMC Entertainment and GameStop could heighten volatility and disrupt the market.
The report points out that the younger investors involved in these trades “tend to have more leveraged household balance sheets.” Losses in the market would leave these folks more vulnerable to meeting their debts.
1, the S&P 500’s Shiller price-to-earnings ratio was 38, and it had recently hit 40 for only the second time in 151 years.
It’s that following the previous four instances where the Shiller P/E topped 30, the S&P 500 eventually went on to lose at least 20% of its value.
A ninth and final reason the stock market could crash over the next three months is history.
Following each of the previous bear-market bottoms, excluding the coronavirus crash, we witnessed either one or two declines of at least 10% within 36 months.
But since the March 23, 2020 bottom, it’s been an almost straight shot higher for the S&P 500.