The Evidence for a Correction Is Compelling

The S&P 500 has closed at new record highs in October after slipping in September, leaving many to speculate about what the S&P 500 will do next. At ITR Economics, we do not forecast the stock market, but we do like to study it. Our Trends Report™ subscribers have been hearing for the past few months that a correction in the S&P 500 is coming. To be clear, we are saying a correction, not a bear market, given that we are not forecasting a recession in the macroeconomy.

We have a collection of leading indicators, as well as our forecasts for the macroeconomy, that suggest we will see the S&P 500 tip over into Phase C, Slowing Growth, in the coming months – giving further credence to an impending correction. One such indicator we’ve been watching closely is US Domestic Corporate Profits With Capital Consumption Adjustments. Profits are at a record high and have been supporting people’s decisions to invest in the stock market. The Profits 3/12 rate-of-change has historically led the S&P 500, but during the past five years the relationship between Profits and the S&P 500 has become tighter. Our analysis shows that the Profits 3/12 is likely at its zenith and is suggesting the S&P 500 is on the verge of Phase C, Slowing Growth.

Looking deeper within the S&P 500, there are clear signs that upward momentum is fading. At ITR Economics we utilize our Checking Points™ system, and one such checking point is watching for a change in the 3/12 rate-of-change. The S&P 500 3/12 rate-of-change has been in a general declining trend for the past four months. Furthermore, the degree of decline in the 3/12 rate-of-change is quite compelling. Here’s why:

• There are 36 similar cases in the past 120 years; all but one of those cases led to a 12/12 peak in the S&P 500.
• On average, the subsequent 12/12 peak occurred five months after the 3/12 peak but could occur up to eight months after the 3/12 peak.
• The S&P 500 3/12 peaked in May 2021, which suggests the 12/12 is likely to peak between October 2021 and January 2022.

Watch closely for the correction, as it will present a buying opportunity. The correction is not expected to be long – three to five months is the modern norm, so your window will be brief.

For additional thoughts on which sectors to be investing in, we recommend discussing your options with Bellwether Wealth , the firm that manages the ITR Equity Optimizer portfolios.