US stocks are on the verge of a correction as interest rates begin to rise, DataTrek says

• US stocks are on the verge of a correction as interest rates begin to rise, according to DataTrek.
• Investor focus will likely fixate on whether or not the Fed raises interest rates in 2022.
• “Fed Funds Futures creeping higher is not good news for stocks,” DataTrek said.
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A pick up in interest rates could knock the current bull market off course temporarily, according to a Thursday note from DataTrek.

DataTrek co-founder Nicholas Colas said that US stocks are due for a sell-off following a strong 20% rally in the S&P 500 since the end of October.

Interest rates have ticked higher in recent weeks, with the 10-year US Treasury Note jumping to 1.31% on Thursday from 0.91% at the start of the year. And even though the Fed has signaled that it does not foresee raising interest rates until 2023, Fed Funds Futures are beginning to signal that the Fed could begin increasing rates in 2022.

“The odds of a Fed policy shift next year has gone from 2% to something closer to 5% to 10%,” Colas said. That doesn’t represent the danger zone yet, “but the trend is clearly not our friend,” the note said.

As interest rates rise, it tends to put pressure on stock prices as the premium assigned to equities drops due to investors re-allocating their portfolios to higher yielding fixed income. Essentially, the bullish “there is no alternative” argument for stocks in a zero interest rate world begins to dissipate.

And based on its analysis of previous bull markets, stocks could decline by 8% sometime in the next 4-6 weeks, DataTrek said.

“As much as the Pandemic Recession is different from the Great Recession, the [S&P 500] index has travelled a very similar path from its respective March lows in both cases,” Colas explained, adding that around this time in 2010, the markets sold off.

LPL echoed DataTrek’s thinking, highlighting in a chart on Thursday that previous bull markets have faced volatile declines at this juncture.