A pullback in the Dow Jones Industrial Average and the S&P 500 Index on Tuesday halted the longest winning streak for stocks in months, but there remains a huge concern for investors: Is a major correction looming?
Even some bullish investors have called for a reduction in stocks as something of a catharsis for the next higher leg and a relaxation of some of the frantic retail-inspired bets that have repeatedly sent stocks to new highs amid the rally. recovery from COVID-19.
A brief setback that began in late January, linked to the commercial fervor around GameStop Corp. GME,
and AMC Entertainment Holdings AMC,
I saw the markets test some short-term bullish trend lines, but recently the markets have managed to rally to produce not unspectacular returns in the first few years of a year full of uncertainties.
The Dow Jones Industrial Average DJIA,
is up 2.5% so far this year, the S&P 500 SPX,
enjoys a steeper gain of over 4%, while the Nasdaq Composite COMP,
and Russell 2000 RUT,
On Tuesday, the indices posted their 10th record close in 2021 so far.
Year-to-date gains on the large-cap Nasdaq, up 8.7%, and the Russell 2000, up 16.4%, reflect a strange convergence of investor bets: Those who bet on higher prosperity in large-cap growth stocks tested by COVID. that worked after the pandemic in the US in March, along with bets for a sizable rally in the small-cap and economically sensitive stocks represented at Russell.
In any case, cautious investors and those worried that the good times might not last forever prepare for the next big stock crash and ponder how it might turn out.
Earlier this week, Morgan Stanley’s Michael Wilson told CNBC during an interview that “it was brief, so if he blinked he would miss it,” referring to the stock’s pullback in late January.
“It seems like that was it for now, and I mean, the markets are pretty powerful right now, and they have been,” Wilson said.
“There is tremendous liquidity, there is a very good and very understandable story behind the scenes. In other words, we have a strong economic recovery that is visible to everyone. The earnings season has been good so far… and people have bought into it, ”said the Morgan Stanley analyst.
However, he warned that the market remains in a “somewhat fragile state” and warned that the leverage in the system could generate setbacks of 3% or 5% more than the norm.
Wilson said, however, that the resurgence of individual investors in the financial markets would be a force to be reckoned with and that they currently represent the marginal buyer on Wall Street that keeps asset prices up.
Keith Lerner, chief market strategist at Truist Advisory Services, said concerns of a stock bubble are overblown and not supported by the current batch of fourth-quarter earnings results, that his firm estimates will be the best since the financial crisis of 2008.
“Although there are sparkling segments of the market that are separated from fundamentals, we do not see bubble conditions more broadly,” Lerner wrote in a research report dated Tuesday.
“Instead, we see a stock market that is trading at a premium to historical valuations, partly justified by low rates, a shift in the composition of the sector towards higher value growth sectors, a supportive fiscal and monetary policy. as well as cheaper access to markets (i.e. a secular decline in fund fees and commissions), ”added Truist analysts, noting that a lower barrier to entry for individual investors was also delivering support for stock values.
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 move gradually during the year,” he told the news network. “I don’t see a correction in the short term, unless the situation changes drastically,” he said, describing possible recessions as mini corrections that will not necessarily change the general uptrend.
What could change things?
Naeem Aslam, AvaTrade’s chief market analyst, said in a report Tuesday that optimism in the US market is driven by three players: support from monetary and fiscal policy, progress on COVID vaccines and strong quarterly results.
“Basically it looks like the stars are lining up, and the odds are strong in favor of another bull rally,” Aslam wrote.
“In other words, we need a major change in the current catalyst to change the market narrative among traders that can trigger a minor pullback, much less a serious correction,” he added.
MarketWatch’s William Watts writes that some experts point to the 2009 stock market as the closest parallel to the current configuration of stocks. Citing Tony Dwyer, Canaccord Genuity’s chief market strategist, Watts noted that 2021 could unfold more like the post-crisis scenario seen in 2010, which would point the way to a “solid year” for the market, but with a full journey. bumpy thanks to “multiple first-half fixes.”
Some of the bumps could emanate from the bond market, with the 10-year TMUBMUSD10Y,
and 30-year Treasury TMUBMUSD30Y,
testing recent performance highs and putting some pressure on equities.
So-called reflation trading, where returns surge and investors gravitate toward investments that could thrive in better economic times, has provided a number of false sunrises for investors so far.