In case you missed it, the stock market celebrated the eighth anniversary of its bull market run in March. Since hitting its lows in March 2009, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 (SNPINDEX:^SPX) have all galloped to new all-time highs and returned 227%, 387%, and 259%, respectively. Mind you, historically stocks return only 7% per year, inclusive of dividend reinvestment, suggesting that investors have really seen the market do something special over the past eight years.
However, we also know that stock market corrections and bear markets are a natural part of investing. Since 1950, according to data from Yardeni Research, there have been 35 stock market corrections of 10% or more, when rounded to the nearest whole number, in the S&P 500. Essentially, we're talking about a double-digit percentage drop in the broad-market index about every two years. Thus, it's not a matter of if this bull market rally is going to end, but when.
There are countless catalysts that could wind up halting this bull market rally in its tracks. Here are 10 of them that could be the actual culprit.
1. Healthcare and/or tax reform legislation flops in Congress
Investors are fully expecting the Republican-led legislative branch of the government to move past its early inter-party bickering and pass new legislation on healthcare and tax reform. In fact, Wall Street has been pricing in lower corporate taxes for some time now. However, if healthcare and/or tax reform fails to come to fruition, investors may decide that they've had enough and push this market decidedly lower.
2. The Fed overshoots
The Federal Reserve faces a ton of criticism for its monetary policy actions, but what no one gives the Fed credit for is that its members are making these decisions based on data that could be weeks or months old. Nevertheless, if the Fed winds up getting too aggressive with its interest rate hikes, it could tank lending activity, increase unemployment, and make outstanding debt more expensive, leading to an increase in credit and mortgage delinquencies.
3. A negative yield "supernova"
Bond guru Bill Gross has suggested that the trillions of dollars held in sovereign debt could explode like a "supernova' and unravel the financial markets. Japan, for instance, has willingly accepted a negative interest rate policy to coerce lending and equity investment, while German bonds pushed into negative territory for a time. As of May 2017, according to Fitch Ratings, $9.5 trillion in sovereign debt still bore a negative yield.
4. The auto loan bubble bursts
Echoing the issues that were seen in the mortgage market roughly a decade ago, subprime auto loan bubble may be next to burst. In May, Bloomberg reported that outstanding auto loan debt has risen by more than 50% since the end of 2010, and the number of subprime loans that were delinquent as of the fourth quarter of 2016 jumped to $1.1 billion. Admittedly, the $1.1 trillion in outstanding car loans pales in comparison to the $10-plus trillion in outstanding mortgage loans, but an uptick in auto delinquencies could certainly cause the stock market some pain.
5. Emotions crater the market
While some investors may be able to keep their emotions in check, there are plenty of others out there who are purely short-term traders and are moving their money around based on rumors and personal emotion. Short-term momentum can be a dangerous thing for those buried in margin debt and dicing in and out of stocks on a daily basis. Emotion-driven trading would likely create only a short-term move lower, but the imagination of investors could still cause a plunge.
6. Company incentives dry up
Another possible reason the stock market could plunge is if the incentives to invest begin to dry up. During the Dec. 2008 to Dec. 2015 period, the Fed kept its fed funds target rate at historic lows, providing ample reason for companies to take on debt in order to aggressively expand, and to buy back their own stock. But as investing mogul Warren Buffett cautioned earlier this year, share buybacks fell by 22% in 2016 from the year prior. Higher interest rates are a deterrent to share buybacks, especially for companies with debt. If these incentives wane, investors may look elsewhere with their money.
7. A technology glitch/flash crash
Just as emotions are a short-term catalyst, technological glitches tend to be short-term in nature, too. The stock market has seen a few "flash crash"-type events perpetuated by trading technology failing to do its job. Though markets often rebound following a flash crash, flash crashes themselves have led to subsequent corrections or "retests" in the stock market days or weeks later.
8. Commodities implode
Generally speaking, consumers are happy when commodity prices fall over the short-term as it helps to make the items they buy cheaper. For example, falling oil prices ease the pain of consumers at the pump, putting more disposable income in their pockets. But if commodity prices continue to weaken, and the price of oil falls dramatically (as an example), we could be talking about job losses and deflation that will have markedly negative impacts on the U.S. economy.
9. Military conflict
We'd all like peace on Earth, but the grim reality is that conflict is quite common. President Trump, who has no previous political or military background, could ruffle the feathers of another country with his commentary, or even a tweet, or a country like North Korea could worry the world with its nuclear program. Though military conflict can benefit defense contractors, it's generally bad news for the economy, and it could wreak havoc on investors' nerves.
10. Political scandal
Somewhat adding to the previous point, Trump and members of his team have been mired in a seemingly never-ending game of "who-done-it?" with regard to possible election tampering. If the president were to somehow face impeachment, or if we saw significant changes made in Trump's cabinet as a result of these ongoing investigations, there is a possibility that investor sentiment could shift decisively negative and push stocks lower.
The one reason you need to stay invested
Honestly, the list above could go on and on, well beyond the 10 catalysts listed above. In fact, the actual reason for the next stock market correction or "plunge" may not even be among the 10 listed above, because we can't accurately predict the future with any certainty. And that point is exactly why you need to stay invested in the stock market over the long term.
The same Yardeni Research data referenced above also shows that in all 35 instances of a stock market correction over the past 67 years, a bull market rally has completely erased the move lower in the S&P 500 -- and it did so in many instances within a matter of weeks or months. And 35-for-35 is about as close to a given as you're going to get when it comes to investing.
Furthermore, as data from J.P. Morgan Asset Management in 2016 showed, timing the market simply isn't a viable strategy. Even though you might luck out and miss some of the worst down days by sitting on the sidelines, around half of the S&P 500's best trading days over the past 20 years came within two weeks of its 10 worst trading days. There's no one on the planet that has a crystal ball that can predict moves like this with any accuracy. Per J.P. Morgan Asset Management's data, buying and holding the S&P 500 from Jan. 3, 1995 through Dec. 31, 2014 would have yielded a 555% cumulative return, or about 9.9% a year. Mind you, this return includes the nearly 50% drop during the dot-com bubble and the 57% plunge during the Great Recession.
Long story short: if you buy high-quality businesses and let them do their thing without sweating the short-term small stuff, you should make money over the long run and handily outpace inflation.