2 Threats to the Market Rally to Keep a Close Eye On

There are two threats that could possibly trigger another selloff, so be sure to watch for them in the near term, and perhaps invest here instead.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published February 8, 2024 8:00 pm EST

| More on: METANVDAXBAL

The market continues to climb, with perhaps just a few wobbles here and there. Yet there are some threats to a continued market rally. So, if you’re worried that these all-time highs are too good to be true, here are two threats that could mean you’re right.

Caution, careful — Image source: Getty Images

Big Tech

Earnings continue to pour in from Big Tech companies in the United States, and they’ve been pretty even with good and bad news. The Magnificent Seven had a clear mix of some companies seeing earnings fall below estimates while others surged past them.

Meta (NASDAQ:META), in particular, saw stellar earnings reports that led to an even higher share price. Yet analysts warn that should next earnings see earnings come in lower than originally hoped, this could trigger a market selloff. Specifically, NVIDIA (NASDAQ:NVDA) reports on Feb. 21, so here’s hoping the company sees even more strong results in the near future.

Unfortunately, Big Tech and the Magnificent Seven take about 20% of the overall S&P 500 market share. So, when you’re seeing the S&P 500 climb higher and higher year to date, that’s really the Magnificent Seven leading the charge.

Therefore, should these companies see a drop, that could trigger a drop in the Index at large. And should that happen, this could trigger a major market selloff across not just the United States but in Canada and even the world. So, keep an eye on these earnings if you want to protect your portfolio.

Inflation

Another more obvious point to continue to watch is inflation. While everyone continues to be narrowly focused on interest rates coming down, that’s simply not going to happen if inflation continues to climb. Inflation rose higher in Canada in December, so hopefully, that comes back down come January numbers

The thing is, it’s been made clear both in Canada and the United States that until we reach that 2% inflation rate, it’s unlikely that interest rates will come down. No matter how much analysts and economists state that we could see an earlier rate cut, that’s simply not going to happen until that 2% is reached.

What’s more, Canada tends to follow the U.S. when it comes to rate cuts and other major financial decisions. That’s mainly because our economies are so connected. Again, not only do we need to see inflation get to 2% in Canada, but perhaps even the U.S. as well before interest rates come down.

If inflation continues to climb, this could trigger yet another drop in the stock market — especially if, in the meantime, we continue to see interest rates remain at 5%.

Bottom line

If you’re looking to protect yourself during this time, then I actually wouldn’t suggest an S&P 500 exchange-traded fund (ETF). Instead, perhaps consider something more like iShares Core Balanced ETF Portfolio (TSX:XBAL). This ETF is just as it sounds: balanced. That balance is between bonds and equities, aiming for that 60/40 split.

What’s more, the ETF has done well compared to the Index. Shares are up about 13% in the last year as of writing and 8% in the last three months alone. All from investing in a balanced mix of assets across a wide range of industries. And, of course, it invests in corporate and government bonds.

So, if you’re worried about the future and a potential drop in the markets, this is certainly an area to place your cash — all while also receiving a dividend yield of 2.44% as of writing.