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Why investors should be on correction watch this May: Allianz's Mahajan

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Why investors should be on correction watch this May: Allianz's Mahajan

It may be the early innings of May, but one top strategist is predicting a bumpy month for stocks.

Equities bounced back Wednesday after a sell-off Tuesday. Growth stocks, the hardest hit, have fallen 1% in just four trading sessions, and they could be in for more pain, said Mona Mahajan, senior U.S. investment strategist at Allianz Global Investors.

"Growth was actually taking a bit of a leadership role over the last month or so as Treasury yields came down from that 1.75% level down to sub-1.60% today. I do think at this point investors are really considering that perhaps we're at the start of a reversal of that move," Mahajan told CNBC's "Trading Nation" on Tuesday.

A rise in rates could be propelled by an assortment of factors, she said – a fully reopened economy in the summer months, continued stimulus and a Federal Reserve on the sidelines while inflation rises could all contribute to the 10-year Treasury yield moving back above 1.7%. Prices and yields move inversely.

"That actually does put downward pressure on areas like technology and growth, which are considered somewhat longer duration assets. Also puts some pressure on some of the bond proxy sectors like REITs and utilities, as well," Mahajan said.

The XLK technology ETF, for example, has fallen 5% from late-April highs – the tech sector has a heavy makeup of growth stocks, those that investors will pay a premium on for future earnings potential. The S&P 500, by comparison, is less than 1% from its own record.  

But, it's not just growth stocks that could come under pressure. Mahajan said the entire market could be due for a pullback.

"The markets have been running quite nicely since November of last year which was election period, which was vaccine rollout period, and we haven't had yet one 5% or 10% correction yet," she said. "In any given year, we tend to see one to three corrections in the broader S&P 500."

A 5% to 10% pullback would bring the S&P 500 down to around the 3,800 to 4,000 range. It hit a high above 4,218 on April 29 and currently trades at around 4,178.

Rising rates could also bring about the end of the TINA investment strategy – an acronym meaning "there is no alternative" to stocks – Mahajan said.

"We've really been in a low-rate environment for 10 years now since the great financial crisis. It really does push investors out the risk spectrum. So, in this case there is no alternative except to own equities when rates are so low. However, if we're now facing an environment where 10-year yields go back up not only to the 1.75% range but back to 2%, 2.25%, investors really may have an alternative to equities," said Mahajan.

The 10-year Treasury note yielded 1.59% on Wednesday. It traded as high as 1.78% in late March.

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