Breaking News: SPX Vulnerable to Bigger Corrections as Yield Curve Steepens, Bank of America Warns
In a recent note, Bank of America strategists have raised concerns about the vulnerability of the S&P 500 (SPX) to bigger corrections as the US 2-year vs. 10-year (2s-10s) yield curve continues to steepen. Historically, steepening cycles in the yield curve have often been precursors to recessions and increased market volatility.
According to BofA, recessions have accompanied 10 of the last 12 steepening cycles, highlighting the potential risks for investors. While the SPX has seen mixed performance during these periods, with average annualized returns of 5.7%, the index has also experienced substantial corrections averaging 26.5%.
Since the current steepening cycle began in June 2023, the largest correction has been a 10.3% drop, but historical data suggests that corrections during these periods could reach as much as 56.8%. With the yield curve steepening and the SPX up 29.5% since June 2023, investors should be cautious of potential larger corrections in the future.
Recent market movements, such as the 10-year yield surpassing 4% and a brief inversion in a key part of the yield curve, have added to concerns about the market's direction. These movements came as expectations for a large rate cut were dialed back after a strong US jobs report, leading to selling of Treasuries and pushing yields higher.
In summary, investors should be aware of the risks associated with a steepening yield curve and potential larger corrections in the market. Historical data and current market conditions suggest that the SPX could face increased volatility and potential downturns in the near future. Stay informed and be prepared for any market shifts that may impact your investments.