After 1,350 days, will the Fed cause correction?

Published Mon, Jun 15 20152:42 PM EDTUpdated Mon, Jun 15 20152:48 PM EDT

It's been about 1,350 days since the S & P 500 last fell 10 percent or more from its peak. But that streak may end during the next three months as the Federal Reserve moves closer to hiking interest rates, according to estimates from more and more firms on Wall Street, including Bank of America Merrill Lynch and J.P. Morgan Monday. Those who don't see a correction still tend to agree that market's fate this year is in the hands of the Fed, which is expected to make more hints in its statement Wednesday that it's ready for liftoff as early as September. Recent losses like the drop on Monday pushed the Dow Jones Industrial Average into negative territory for 2015. All is not lost for investors, however, as certain asset classes and stocks are set to make it through the selling with just a few dents, and then thrive as the central bank normalizes policy. "The increased debate around Fed liftoff and eventual hike is likely to increase equity volatility and negatively impact investor sentiment. This could result in five to ten percent market corrections between now and YE (year-end)," wrote J.P. Morgan's Dubravko Lakos-Bujas. The firm said that short-term rates and equities had a negative correlation since 1963, lending some historical context to the strategist's call for a pullback. Financial stocks are the way to go as the Fed raises rates because of the group's positive correlation to a steepening yield curve and inflation, according to J.P. Morgan. The firm also sees technology and health-care stocks riding out the coming volatility. J.P. Morgan recommends clients avoid utilities and consumer staples ahead on the risk higher rates will provide some competition to these companies' dividend yields. Read More Cybersecurity stocks hit high; Goldman sees more "No one's going to wait until September when the words come out of Yellen's mouth," said Mike Harris of managed futures hedge fund Campbell & Co. His firm is betting against bonds and gold and is long the U.S. dollar versus several currencies in anticipation of the rate hike. Campbell's pared back its equity position and plans to cut its position more if volatility increases further. To be sure, Jonathan Golub of RBC Capital Markets notes that two times previously in history (2003 to 2007, 1990 to 1997) the S & P 500 marched on for a longer period than now before a correction. So this rally doesn't necessarily need to end in coming months, said the strategist. "Don't fear the Fed," wrote Golub in a report Monday. "Bottom line, we believe the current path of the market will proceed unabated in this 'slower-for-longer' recovery." Other strategists, however, said the depth of the stock market correction depends upon the pace by which the Fed raises rates over the next year. "We expect the Fed to start raising rates in 25 basis points increments beginning at the end of 2015, and moving roughly every other meeting thereafter. This equates to 100 basis points a year, half the pace of previous cycles," wrote Savita Subramanian of Bank of America Merrill Lynch in her Monday report. "Gradual tightening cycles have actually been friendly to market multiples." But before that positive effect, Subramanian sees the S & P 500 falling 5 to 10 percent in the coming months as the timing of the first rate increase becomes clear. To ride out that volatility, the strategist advised clients to buy "high quality" stocks. Read More Retail traders have a new favorite cult stock

Traders work on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

It's been about 1,350 days since the S&P 500 last fell 10 percent or more from its peak.

But that streak may end during the next three months as the Federal Reserve moves closer to hiking interest rates, according to estimates from more and more firms on Wall Street, including Bank of America Merrill Lynch and J.P. Morgan Monday.

Those who don't see a correction still tend to agree that market's fate this year is in the hands of the Fed, which is expected to make more hints in its statement Wednesday that it's ready for liftoff as early as September.

Recent losses like the drop on Monday pushed the Dow Jones Industrial Average into negative territory for 2015.

All is not lost for investors, however, as certain asset classes and stocks are set to make it through the selling with just a few dents, and then thrive as the central bank normalizes policy.