Is the Market Poised for a Correction
Is the Market Poised for a Correction?
I know, these are words of blasphemy, but they need to be uttered.
There is no evidence that stocks are rich here. In fact, to the contrary. Things look great…and that’s what worries me.
The economic and market statistics are certainly rosy. Americans began 2020 extremely confident about the economy primarily from a strong stock market and the lowest unemployment rate in over 50 years, with the consumer confidence index climbing to a five-month high of 131.6 in January, up from an already high 128.2 in the prior month.
In fact, it was the strongest reading since last August when the index hit an 18-year high of 137.9; right about the time of the 4th quarter selloff.
Confidence abounds! One index that gauges how consumers feel about the economy right now rose 5 points to 175.3, while another that assesses how Americans view the next six months — the so-called future expectations index — edged up to 102.5 from 100.
Even confidence in the job market is soaring with the share of Americans who said jobs were plentiful rose to 49% from 46.5% and the percentage who felt jobs were hard to find fell to 11.6% from 13%. The unemployment rate at the end of 2019 was 3.5%, the lowest level since the late 1960s.
However, my many years in this business has taught me that “When life looks like easy street, there’s danger at your door”. I much prefer when negativity is pervasive and the market goes climbing that proverbial “wall of worry”.
What I’m seeing now is the opposite. There seems to be a widespread lack of pessimism among investors and I fear that the long-awaited correction could be close at hand.
What normally happens is that some catalyst emerges as “the excuse”, to spook investors. That could be the Coronavirus, Bernie Sanders or Elizabeth Warren rising in the polls, a breakdown of the U.S.-China trade talks or a whole host of other things.
Of course, the economic numbers, as well as investor confidence figures, can go higher, possibly much higher before any danger emerges causing a correction. However, I’d rather be safe than sorry and take some action to reduce risk.
Therefore, I made some allocation adjustments last week to reduce some of the risk in most portfolios (mind you, I am not bearish). I just think this market has gotten a little ahead of itself and a pullback is due so I took a little bit off the table. If we get a decent correction in the 5-7% or even 10% range, I would get more positive again and trade things back.
I hope that we get our overdue and much-needed pullbacks shortly. With any luck, it will be short but please keep in mind that it is likely to be scary and cause your stomach to turn a bit. Corrections must cause fear to reduce over-optimism.
I remain both positive for the economy and bullish for the stock market long term, and I think it’s going to be a good year for investors. It’s just not going to be as smooth as last year and expect it to be a bit more bumpy and volatile.
As always, feel free to contact me with any comments or questions.
“Invest for need, not for greed!™”