The decline in the Dow Jones industrial average and the S&P 500 index slowed the longest winning streak in equities in recent months on Tuesday, but it remains a major concern for investors: a major correction is approaching ?
Even some bullish investors have called for a reduction in stocks as a kind of catharsis for the next higher stage and disconnect from some of the frantic retail-inspired bets that have sent stocks to new highs amid the recovery of the stock market. COVID-19.
A brief setback that began in late January, tied to the commercial fervor surrounding GameStop Corp. GME,
and AMC Entertainment Holdings AMC,
the markets tested some short-term uptrend lines, but recently the markets have managed to recover to produce non-spectacular returns in the early years of a year full of uncertainties.
The Dow Jones Industrial Average DJIA,
has risen 2.5% so far this year, the S&P 500 SPX,
enjoys a steeper gain of more than 4%, while the Nasdaq Composite COMP,
and Russell 2000 RUT,
so far, the indexes reached their tenth record on the 20th.
The year-on-year gains of the capital Nasdaq, up 8.7% and the Russell 2000, up 16.4%, reflect a strange convergence of investor bets: those betting on greater prosperity in large-cap growth stocks tested by COVID which operated after the US pandemic in March, along with bets on a considerable rebound in the economically sensitive small-cap stocks represented at Russell.
In either case, prudent investors and those worried that good times may not last forever are preparing for the next big fall in stocks and ruminating on how it could develop.
Earlier this week, Morgan Wilson’s Michael Wilson told CNBC in an interview that “it was brief, so if you blinked you wouldn’t find it,” referring to the stock’s decline in late January.
“It seems like it was like that for now, and I mean right now the markets are pretty powerful and they have been,” Wilson said.
“There is tremendous liquidity, there is a very good and very understandable story behind the scenes. That is, we have a strong economic recovery visible to everyone. The profit season has been good so far … and people have bought into it, ”Morgan Stanley analyst said.
However, he warned that the market remains in a “somewhat fragile” state and warned that the leverage that is being turned on the system could cause setbacks of 3% or 5% more than the norm.
Wilson did say, 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 while keeping asset prices on the rise.
Keith Lerner, chief market strategist at Truist Advisory Services, said concerns about a stock market bubble are exaggerated and not backed by the current batch of fourth-quarter results, which his company estimates will be the best since the financial crisis of 2008.
Truist Advisory Services Inc./SunTrust Advisory Services Inc.
“While there are sparkling market segments that break away from the fundamentals, we don’t see bubble conditions more broadly,” Lerner wrote in a research report dated Tuesday.
“Instead, we see a stock market that is trading at a price higher than historical valuations, justified in part by low rates, a change in the composition of the sector towards higher value growth sectors, a monetary policy and favorable fiscal, as well as cheaper market access (i.e., secular decrease in commissions and fund commissions), ”Truist analysts added, noting that a lower barrier to entry for individual investors it also provided support for stock values.
Meanwhile, Daniel Pinto, co-chair of JPMorgan Chase & Co., told CNBC in a Q&A that he expects the stock market to grow further.
“I think the market will be growing progressively over the year,” he told the news network. “I don’t see a correction soon unless the situation changes drastically,” he said, describing possible recessions as mini-corrections that won’t necessarily change the overall uptrend.
What could change things?
Naeem Aslam, chief analyst at AvaTrade, said in a report on Tuesday that optimism in the US market is driven by three actors: support for monetary and fiscal policy, progress on COVID vaccines, and solid quarterly results.
“Basically, it looks like the stars are lining up and there are strong odds stacked in favor of another concentration of bulls,” Aslam wrote.
“In other words, we need something important that changes in the current catalyst to change the market narrative among traders that could cause a minor setback, let alone a serious correction,” he added.
William Watts of MarketWatch writes that some experts point to the 2009 stock market as the closest parallel to the current equity setup. Citing Tony Dwyer, chief market strategist at Canaccord Genuity, Watts noted that 2021 could play more like the post-crisis scenario seen in 2010, which would point the way to a “solid year” for the market, but with a bumpy trip thanks to “multiple corrections of the first half”.
Some of the falls could emanate from the bond market, with the TMUBMUSD10Y at 10 years old,
and 30-year-old Treasurys TMUBMUSD30Y,
testing recent performance highs and pressing stocks.
The so-called reflation trade, where yields rise and investors engage in investments that could thrive in better economic times, has so far provided a number of false dawns for investors.