A pullback for the Dow Jones Industrial Average and the S&P 500 index on Tuesday halted the longest earnings streak for stocks in months, but a major concern for investors remains: Is there a major correction on the way?
Even some bullish investors have called for a stock cut as some sort of catharsis for the next leg higher and to relax some of the insane retail-inspired bets that have repeatedly sent stocks to new records during COVID’s recovery. -19.
A brief downturn that started in late January, linked to the trading drive around GameStop Corp. GME,
and AMC Entertainment Holdings AMC,
saw markets test some short term bullish trend lines, but recently markets have managed to pull back to not produce unspectacular returns at the beginning of a year riddled with uncertainty.
The Dow Jones Industrial Average DJIA,
is up 2.5% in the year so far, the S&P 500 SPX,
enjoy a more pronounced gain of over 4%, while the Nasdaq Composite COMP,
and Russell 2000 RUT,
indexes on Tuesday set their 10th record so far in 2021.
The gains since the start of the year in the large capitalization Nasdaq, up 8.7%, and the Russell 2000, up 16.4%, reflect a strange convergence of investors’ bets: those who bet on further prosperity in COVID-tested large-cap growth stocks that worked in the wake of the March pandemic in the US, as well as betting for a significant recovery in the economically sensitive small-cap stocks in the Russell.
In either case, prudent investors and those who fear that the good times may not last forever are bracing themselves for the next big slump for stocks, worrying about how it might turn out.
Earlier this week Morgan Stanley’s Michael Wilson told CNBC during an interview, “It was short, so if you blinked, you missed it,” referring to the stock slump in late January.
“That looks like it was now, and I mean the markets are pretty strong right now, and they have been,” Wilson said.
“There is enormous liquidity, there is a very good and understandable story behind the scenes. This means that we have a strong economic recovery that is visible to all. The earnings season has been good so far… and people have bought it, ”said Morgan Stanley analyst.
However, he cautioned that the market remains in a ‘somewhat fragile state’ and warned that the swirl of leverage in the system could make a drop of 3% or 5% more from the norm.
However, Wilson said the re-emergence 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 and keep asset prices high.
Keith Lerner, chief market strategist at Truist Advisory Services, said concerns about a stock bubble are exaggerated and not supported by the current batch of fourth-quarter earnings results, which his firm estimates will be the best since the 2008 financial crisis. .
Truist Advisory Services Inc./SunTrust Advisory Services Inc.
“While there are frothy segments of the market that are separate from fundamentals, we don’t see the state of the bubble wider,” Lerner wrote in a research report Tuesday.
“Instead, we see a stock market that trades at a premium to historical valuations – partly justified by low prices, a shift in sector composition to higher valued growth sectors, supportive monetary and fiscal policies, as well as cheaper access to markets (i.e. secular decrease in commissions and fund fees), ”added the Truist analysts, noting that a lower barrier to entry for individual investors also provided support for stock values.
Meanwhile, Daniel Pinto, a co-president at JPMorgan Chase & Co., told CNBC in a Q&A that he expects the stock market to spin higher.
“I think the market will grind gradually over the year,” he told the news network. “I don’t see a correction anytime soon unless the situation changes dramatically,” he said, describing potential downturns as mini-corrections that won’t necessarily change the overall bullish trend.
What can change things?
Naeem Aslam, chief market analyst at AvaTrade, said in a report on Tuesday that optimism in the US market is being driven by three actors: monetary and fiscal policy backing, progress on COVID vaccinations and the solid quarterly results.
“Basically it looks like the stars are lining up, and there are strong chances in favor of another bull rally,” Aslam wrote.
“In other words, we need something sweeping changes to the current catalyst to shift the market narrative among traders, which could cause a small downturn – let alone a serious correction,” he added.
MarketWatch’s William Watts writes that some experts point to the 2009 stock market as the best parallel to the current set-up for stocks. Citing Tony Dwyer, chief market strategist at Canaccord Genuity, Watts noted that 2021 could be more like the 2010 post-crisis scenario, which would set the stage for a ‘solid year’ for the market, but with a bumpy ride thanks to ‘ multiple corrections in the first half. “
Some of the bumpiness could stem from the bond market, with the 10-year TMUBMUSD10Y,
and 30-year-old Treasurys TMUBMUSD30Y,
testing recent yields and putting some pressure on equities.
So-called reflation trading, where yields are increasing and investors are attracted to investments that can thrive in better economic times, has so far created some false dawns for investors.