The sell-off in the stock market could be turned around by lower oil prices and stabilizing bond yields, LPL Financial says

• A drop in oil prices and the 10-year Treasury yield from multi-year highs could help prompt a turnaround for stocks, LPL Financial said Monday. 
• The S&P 500 on Monday sank briefly into correction territory.
• Stocks have been sliding this year as the Fed prepares to tackle hot inflation with rate increases. 

Oil pulling away from multi-year highs and continued descent in the 10-year Treasury yield could serve as catalysts for the US stock market to halt its plunge, according to one strategist.  

The S&P 500 on Monday sank into a correction, hurt by ongoing fears the Federal Reserve will raise interest rates multiple times this year tamp down on inflation. The Dow Jones Industrial Average also skirted around a correction, a move that follows the Nasdaq Composite last week logging a more than 10% drop from recent highs. 

“So what might turn this market around? Stabilization in interest rates would help,” Jeff Buchbinder, equity strategist at LPL Financial, wrote in a note Monday. “The 10-year Treasury yield’s inability to break through 1.9% last week and subsequent dip below 1.8% is a good start.” 

The 10-year yield on Monday fell to 1.72% after soaring to a two-year high last week. Yields had been climbing in anticipation of the Fed raising its benchmark interest rates to help draw consumer price inflation from a near 40-year high. The Fed funds rate current stands at a range between 0% and 0.25%. 

“Stock valuations are interest rate sensitive and harder to justify if bond yields go much higher,” said Buchbinder. The price-to-earnings ratio for the S&P 500 using the 2022 consensus estimate for per-share corporate earnings per share just below 20, he said. 

The Nasdaq has been knocked down as the stretch-up in yields puts pressure particularly on tech stocks as more expensive borrowing costs threaten the value of future profit for those companies. 

Inflation is clearly a key risk for markets but investors could soon see more evidence of easing supply chain bottlenecks and more people getting into the workforce as coronavirus disruptions subside, he said. 

“When the market begins to gain more confidence that inflation will start coming down, hopefully as winter turns to spring, inflation may turn from stock market detractor to a contributor,” he said. 

The Fed concluding its first policy meeting of 2022 on Wednesday “without any negative surprises would also help,” the stock market, said Buchbinder. “Stable or lower oil prices would help as well.” 

Oil prices on Monday were in retreat after recently driving to highs not seen since October 2014. Gasoline accounts for about 4% of the overall consumer price index CPI, but those prices have risen more than any other good or service over the past year, according to the Pew Research Center.  The annual CPI in December surged to 7%. 

West Texas Intermediate crude on Monday dropped below $83 a barrel and Brent crude, the international benchmark, fell below $86 a barrel.