“Ridiculous” says the Band Wagon crowd. “Not a chance say most of the money managers interviewed. “Bet me” say a very few analysts.However, for every analyst that says “down”, there is one that says “up”. Remember that for every buyer in the stock market, there is a seller. SO somebody is wrong in every transaction.
So Mars— the M & M folks (Merrill and Morgan Stanley) are more than cautious. At least one of the lead analyst’s at each firm says the odds of an early 2018 correction are very high. In fact, if you like consensus analyst opinions, it is about 80% for an early 2018 correction. Also remember that a correction is defined as a price decline of more than 10% that stops an upward trend. The last correction Ended February, 2016. More importantly, it IS NOT the end of the investing world as we know it. Below, I give the ONE tip to weather a short term correction.
Widely followed and widely respected Bank of America chief investment strategist, Michael Hartnett has said a correction is due “soon”.”It won’t be your average correction. It’s going to be something a little more meaningful. It will depend on a lot of factors,” he said. Hartnett also said he does not see the end of the bull market, as a new bear market would not begin without a recession or some other major event. Hartnett “The call is it’s a lot of risk assets will get caught up, High yield, emerging market debt and equities, those would be the three asset classes that would be most likely to come under pressure,”
Morgan Stanley chief equity strategist Mike Wilson has expected the S&P 500 to reach 2,700 before selling off in a sharp correction, but now he expects the S&P to go higher to peak at 2,750, “We expect volatility to finally pick up in a more sustained manner as growth decelerates and financial conditions tighten,” MS strategists wrote. “We would be very surprised if we don’t return to a more normal environment and witness at least one if not several 10 percent plus drawdowns next year.”
The Morgan Stanley strategists said the stock market has yet to see the “full-blown euphoria” they called for in the beginning of the year, and the final missing ingredient to bring the bull market to an end could be new flows from retail investors. (more likely corporate stock buybacks spurred by tax cuts, in my book). “We suspect that could happen in early 2018 with the signing of a tax bill,” said the strategists. Separately, other analysts have said they see anecdotal signs of individual investors gaining confidence in stocks and making more investments. I call that the “Bandwagon” approach or colloquially, the “Sheep” approach.
“Our new year end 2018 base case price target for the S&P is 2,750 and we would not be surprised if we reach that target during 1H 2018 and it marks the high for the year,”
Vanguard Group sees a 70% chance of a US stock market correction. “Having a 10% negative return in the US market in a calendar year [within a five-year forward period] has happened 40% of the time since 1960. That goes with the territory of being a stock investor,” Joe Davis, Vanguard’s chief economist says, adding, “the continued compression of risk premium is one of the indicators for the imminent correction,”
The best momentum analyst I have ever met (and I do not have his permission to use his name, because he only manages his own money) says to expect a correction in late January, after the euphoria, followed by a slightly down (2—5%) rest of the year.
But, stocks have had consistent returns of 9-10% over time, you say? How much time? A decade? No! We lost a decade: A $1 investment in the S&P 500 on Dec. 31, 1999, was worth roughly 90 cents at the end of 2009 — and that negative return includes dividend income. In contrast, investments viewed as havens, or more conservative places to park cash, delivered positive returns in the 2000s. A $1 investment in gold grew to nearly $4, And a buck invested in U.S. government bonds, arguably the world’s safest investment, grew to nearly $2.
What is the Perfect storm that will usher in a correction?
Tax euphoria will die quickly when reality steps in. Corporate tax cuts do not free up cash to create new jobs and new technology. They do increase corporate profits, executive bonuses and stock buy backs ( a market stimulator, by the way). Even that levels out.
History proves that voodoo economics does not work.
Wages growth is lower than expected.
Economic growth may be uncertain, by then.
Trade imbalance will grow only exponentially to US diplomacy, if any.
Global Bond buyers may dry up in disgust.
Gold will go up.
And fortunately, Bitcoin is too small a component to have any impact.
The US dollar, fresh off multiyear lows, looks to be reversing to the upside.
The flattening of the yield curve.
Leading economic indicators are hitting extremes, suggesting peaks are “more likely than not”.
Democrat narrowing of Congressional seats in the fall will cause some sell off.
Forget about you and me and the individual investors, Mutual funds and Money Managers. All followers.
So what do you do to ward off the imminent correction(s)?
Nothing you aren’t already doing. Wait it out. Corrections are most often short-term, with a bounce back. Even if some of the pundits are right and there are 2 or 3 corrections in 2018, and the year finishes down 3% or so, be smart and hold on. Don’t sell into it, Buy. Play it safe. Either watch closely or don’t watch at all (my personal choice). It’s important to remember that corrections rebound fairly quickly. As support, look at 2017: From March 1 (2395.96). To September 8 (2461.42) the S &P 500 was up 2.7%. In a 17% up year.
And while I’m at it, Retail TDFs will be big winners as safe havens. Alabama wins the NCAA Football Championship and Duke is the NCAA Men’s Basketball National Champion. Tribe/Cubs. Go Tribe.
Moment of Truth: in December 2018. If the S&P 500 id down about 1% for the year, consider that good news, if you follow the tip above.
Regards,
John