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A pullback in the Dow Jones Industrial Average and S&P 500 on Tuesday ended the longest winning streak for stocks in months, but a major concern for investors remains: A major correction looming on the horizon?
Even some bullish investors have called for a cut in stocks as a sort of catharsis for the next step and an unwinding of some of the frenzied and inspired retail betting that has repeatedly sent the stocks to new highs in the midst of the resumption of COVID-19.
A brief decline that began at the end of January, linked to the commercial fervor around GameStop Corp. GME,
and AMC Entertainment Holdings AMC,
have seen markets test some short-term uptrendlines, but recently the markets have managed to recover to produce unspectacular returns at the start of a year full of uncertainties.
The Dow Jones Industrial Average DJIA,
is up 2.5% so far in the year, the S&P 500 SPX,
benefits from a more pronounced gain of over 4%, while the Nasdaq Composite COMP,
and Russell 2000 RUT,
The indices on Tuesday marked their 10th closed record in 2021 so far.
Year-to-date gains in the large-cap Nasdaq, up 8.7%, and in the Russell 2000, up 16.4%, reflect a strange convergence of investor bets: those who bet on greater prosperity in COVID-tested large-cap growth stocks that worked in the aftermath of the pandemic in the United States in March, alongside bets for a significant rebound in economically sensitive small-cap stocks represented in the Russell.
Either way, cautious investors and those worried that good times won’t last forever are preparing for the next major drop in stocks and considering how it might play out.
Earlier this week, Morgan Stanley’s Michael Wilson told CNBC in an interview that “it was brief, so if you blinked you missed it,” referring to the stock pullback in late January.
“Seems like that was it for now, and I mean, the markets are pretty strong right now, and they have been,” Wilson said.
“There is a lot of cash, there is a very good and very understandable story behind the scenes. This means that we have a strong economic recovery visible to all. It’s been a good earnings season so far… and people have bought into it, ”the Morgan Stanley analyst said.
He warned, however, that the market remains in a “somewhat shaky state”, and warned that swirling leverage in the system could pull back 3% or 5% more from norm.
Wilson said, however, that the re-emergence of individual investors in financial markets would be a force to be reckoned with, and that they currently represent the marginal buyer on Wall Street in keeping asset prices on the rise.
Keith Lerner, chief market strategist at Truist Advisory Services, said fears of a market bubble are overblown and unsupported by the current batch of fourth quarter results, which his firm says will be the best since the 2008 financial crisis.
Truist Advisory Services Inc./SunTrust Advisory Services Inc.
“While there are foamy segments of the market that are detached from the fundamentals, we don’t see bubble conditions more broadly,” Lerner wrote in a research report dated Tuesday.
“Instead, we are seeing a stock market that is trading at a premium over historical valuations – partly justified by low rates, a shift in the composition of the sector towards more valued growth sectors, monetary policy and favorable budget, as well as cheaper access to markets (i.e. secular reduction in commissions and fund fees), ”added Truist analysts, noting that a lower barrier to entry for individual investors also supported the value of the shares.
Meanwhile, Daniel Pinto, co-chairman of JPMorgan Chase & Co., told CNBC in a question-and-answer session that he expects the stock market to rise.
“I think the market will gradually strengthen over the year,” he told the news network. “I don’t see a correction anytime soon, unless the situation changes drastically,” he said, describing possible slowdowns as mini-corrections that won’t necessarily change the overall uptrend.
What could make a difference?
Naeem Aslam, chief market analyst at AvaTrade, said in a report on Tuesday that optimism in the U.S. market is driven by three players: monetary and fiscal policy support, progress in COVID vaccinations and strong quarterly results .
“Basically it looks like the stars are lining up, and there is a good chance for another bullish rally,” Aslam wrote.
“In other words, we need something major change in the current catalyst to shift the market narrative among traders, which can trigger a slight pullback – not to mention a serious correction,” he said. -he adds.
William Watts of MarketWatch writes that some experts point to the 2009 stock market as the closest parallel to the current pattern of stocks. Quoting Tony Dwyer, chief market strategist at Canaccord Genuity, Watts noted that 2021 could look more like the post-crisis scenario seen in 2010, which would pave the way for a “strong year” for the market, but with a bumpy ride. thanks to “several corrections in the first half. “
Some of the bumpiness could come from the bond market, with the 10-year TMUBMUSD10Y,
and treasures of 30 years TMUBMUSD30Y,
test recent highs in yields and put some pressure on stocks
The so-called reflation trade, where yields rise and investors turn to investments that are likely to thrive in better times, has so far provided a number of false dawn for investors.
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