The stock market could still face a 10% correction even as the Fed nails a perfect ‘no landing’ economic recovery, market vet says

• The stock market could face a 10% correction even as economic strength supports a “no landing” scenario, according to Ed Yardeni.
• Yardeni observed strong retail sales in March and an updated first-quarter GDP growth estimate of 2.8%.
• “The US economy is still flying high. That’s because consumers didn’t get the recession memo,” Yardeni said.

Continued strength in the US economy supports a “no landing” scenario, but that doesn’t mean the stock market will dodge a 10% correction, according to market veteran Ed Yardeni.

Yardeni said in a note on Monday that even after a strong retail sales report, the S&P 500 is at risk of testing its 200-day moving average at around 4,700 over the next few months.

“That would be a classic 10% correction,” Yardeni said.

Yardeni observed that rising bond yields, with the 10-year Treasury yield hitting its highest level of the year on Tuesday at 4.69%, are starting to weigh on stock prices.

That can be seen in the percentage of S&P 500 stocks that are trading above their 50-day moving average, which fell from the overbought level of about 80% last month to about 30% today.

“We are increasingly convinced that the S&P 500 made a short-term top on March 29 at 5254.35. It is down 3.7% since then to 5061.82 today, dropping below its 50-day moving average,” Yardeni said. “The market was overbought and may now be moving towards being oversold.”

But a healthy correction in the stock market should not discount the continued strength of the US economy.

Following the strong March retail sales data, which was more than double economist expectations, Yardeni observed that the Federal Reserve’s first-quarter GDP growth estimate was upgraded to 2.8% from a prior estimate of 2.4%. The Fed has since boosted its GDP growth estimate to 2.9%.

“The US economy is still flying high. That’s because consumers didn’t get the recession memo. They keep spending because real disposable income is rising, more Americans are retiring and have the means to do so comfortably, and six million or more ‘newcomers’ are consuming here rather than south of the border,” Yardeni said, referring to the influx of immigrants that are helping power the US economy higher.