A retracement for the Dow Jones Industrial Average and the S&P 500 on Tuesday halted the longest stock winning streak in months, but a major concern for investors remains: is there a major correction ahead?
Even some bullish investors have called for a retraction in stocks as a kind of catharsis for the next bullish step and a reduction in some of the frantic retail-inspired bets that have repeatedly pushed stocks to new records amid the recovery of COVID-19.
A brief setback that began in late January, linked to the commercial fervor surrounding GameStop Corp. GME,
and AMC Entertainment Holdings AMC,
saw markets test some short-term bullish trend lines, but recently markets have managed to recover to produce unspectacular returns at the beginning of a year fraught with uncertainty.
The Dow Jones Industrial Average DJIA,
rose 2.5% so far this year, the S&P 500 SPX,
is enjoying a more pronounced gain of more than 4%, while the Nasdaq Composite COMP,
and Russell 2000 RUT,
the indexes on Tuesday registered their tenth record of closings in 2021 so far.
The accumulated gains of the year in the large-cap Nasdaq, up 8.7%, and in Russell 2000, up 16.4%, reflect a strange convergence of investor bets: Those who bet on greater prosperity in growth stocks of large capitalization tested by COVID that worked in the aftermath of the pandemic in the United States in March, alongside bets for a considerable recovery in the low capitalization and economically sensitive stocks represented in Russell.
In either case, cautious investors and those concerned that the good times will not last forever are preparing for the next big stock crash and ruminating on how it might happen.
Earlier this week, Morgan Stanley’s Michael Wilson told CNBC during an interview that “it was brief, so if you blinked, you lost,” referring to the stock retraction in late January.
“It looks like this is it for now, and I mean, the markets are very powerful right now, and it has been,” said Wilson.
“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 visible to everyone. The earnings season has been a good one so far … and people believed in it, ”said Morgan Stanley analyst.
He warned, however, that the market remains “a little fragile” and warned that leverage spinning in the system could cause setbacks of 3% or 5% more than normal.
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, keeping asset prices fluctuating.
Keith Lerner, chief market strategist at Truist Advisory Services, said that concerns about a stock bubble are exaggerated and are not supported 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 foamy segments of the market that are separate from the fundamentals, we don’t see the bubble conditions more broadly,” wrote Lerner in a research report dated Tuesday.
“Instead, we see a stock market that is being traded at a premium over historical valuations – partially justified by low rates, a shift in the composition of the sector towards higher growth sectors, favorable monetary and fiscal policy , as well as cheaper access to markets ie secular decline in commissions and fund fees), ”added Truist analysts, noting that a lower barrier to entry for individual investors was also providing 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 grow 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 possible slowdowns as minor corrections that will not necessarily change the general upward trend.
What can change things?
Naeem Aslam, AvaTrade’s chief market analyst, in a report on Tuesday said that optimism in the US market is driven by three actors: support for monetary and fiscal policy, progress on COVID vaccinations and solid quarterly results.
“Basically, it looks like the stars are coming in and there is a high probability of another bullish,” wrote Aslam.
“In other words, we need a big change in the current catalyst to change the market narrative among traders, which could trigger a small downturn – let alone a serious correction,” he added.
William Watts of MarketWatch writes that some experts are pointing to the 2009 stock market as the closest parallel to the current stock setting. Quoting Tony Dwyer, chief market strategist at Canaccord Genuity, Watts noted that 2021 could be more like the post-crisis scenario seen in 2010, which would point the way to a “solid year” for the market, but with a journey bumpy thanks to “several first semester fixes.”
Some of the turmoil may emanate from the bond market, with the 10-year TMUBMUSD10Y,
and TMUBMUSD30Y 30-year Treasures,
testing recent yield rises and putting some pressure on stocks.
So-called reflective trade, in which yields rise and investors gravitate towards investments that can thrive in better economic times, has provided a series of false dawns for investors so far.