Rising interest rates pose the biggest threat to the current bull market, according to Piper Sandler. In a Thursday note, the investment firm looked at the main catalysts that have resulted in 27 S & P 500 corrections of 10% or more over the past 60 years. Chief investment strategist Michael Kantrowitz identified three major risks: rising interest rates, worsening unemployment and unforeseen global shocks. The chart below depicts every market correction of 10% or more for the S & P 500 since 1964. The three columns titled “higher rates,” “job losses” and “global shocks” denote the contributing risk factors for each pullback. Rate-driven market pullbacks have historically been the most common type of correction, although Kantrowitz noted that their frequency waned in the post-Global Financial Crisis world of zero interest rates. But as inflation has lingered at higher levels following the Covid-19 pandemic, rising rates are again the primary threat to equities, suggesting a potential 10% correction could be in the offing. Catalysts that could push rates higher this year include sticky inflation and employment surprises, while President Donald Trump’s tariff policies could further add to volatility, Kantrowitz said. “Our expectation is that rates will be volatile and rangebound in the 4%-5% range this year,” the strategist said, adding that “4.5% has been a threshold level where equities have been uncomfortable with rates increasing. The higher rates climb above 4.5%, the more potential equity downside. When rates were lower, markets could tolerate an increase in rates, but given that we are already at uncomfortably high levels, there isn’t any wiggle room for rates to rise.” On the flip side, the strategist highlighted that the “sharpest and longest equity downturns” have generally accompanied employment-driven corrections. While rate-driven pullbacks have by far been the most common, they have also led to less severe declines over a shorter period of time. The third type of pullback, resulting from global issues, has averaged around a 15% drawdown and is the shortest in duration.
