Stock Investors Should Fasten Seat Belts for More Plunges

Has the recent correction in stock prices run its course? Is it just taking a pause before continuing downward? If the market stages a full recovery, might future plunges lay ahead? "I wouldn't be surprised if we have a deeper sell-off later in the year. I think it's a tradeable bounce right now because we did test the 200-day moving average. When you think about it, fundamentally things haven't really changed that much," said Sam Stovall, chief investment strategist at CFRA, in remarks to CNBC. Kristina Hooper, chief global market strategist at Invesco, agrees. "I would expect whiplash to continue. The negative animal spirits that are in the market today don't look like they're abating," she told CNBC in a separate report.

After enduring a 10.2% correction from the record high close on January 26 through the close on February 8, the S&P 500 Index (SPX) has rallied, cutting the net decline to 7.3% through February 13. Nonetheless, the 27 million worldwide readers of Investopedia still have deep concerns about the securities markets, as measured by the Investopedia Anxiety Index (IAI).

'Pandora's Box of Concerns'

Hooper indicated to CNBC that there might be multiple corrections of 10% or so during the next 10 months. The government report released on February 2 indicating that wages had risen by 2.9% during the past year "opened up a Pandora's box of other concerns," in her opinion. Specifically, that report spurred expectations of higher inflation and higher interest rates, sending the yield on the 10-Year U.S. Treasury Note to close at 2.852% on February 2, up from 2.773% at the open, per CNBC.

Other analysts, CNBC says, worry that evidence of accelerating inflation may cause the Federal Reserve to raise interest rates faster than currently expected. Hooper also notes that concerns are mounting regarding tax reform and the growing federal budget deficit, which will bring a flood of new government debt on the market, pushing interest rates up yet higher. In the end, despite her expectations that stocks will endure a "lumpy or bumpy" ride in 2018, Hooper nonetheless told CNBC that equity prices could be 10% higher by year-end.

Some observers see parallels today with the 2008 financial crisis and the 2007–09 bear market. Just as then, complex securities and trading strategies had a role in the recent correction. (For more, see also: Stock Sell-Off Has Worrisome Similarities to 2008 Crisis.)

Others see echoes of the 1987 stock market crash and ensuing bear market. They were touched off by computerized program trading and algorithmic trading gone wild. (For more, see also: How Algo Trading Is Worsening Stock Market Routs.)

Those with a long sense of history worry about sky-high equity valuations reminiscent of those that preceded the great 1929 stock market crash. (For more, see also: Why The 1929 Stock Market Crash Could Happen In 2018.)

Unusual Correction

David Bianco, chief investment strategist for the Americas at Deutsche Asset Management, wrote in a note quoted by CNBC, "it's very unusual for a correction to begin as S&P EPS estimates are being revised upward. And there has been no sudden new news suggesting this trend is about to reverse."

Stovall, per CNBC, suggests that a market-beating strategy would be to buy the sectors that did the worst during the correction, as well as the 12 sub-industry sectors that fell the most. The three worst-performing sectors, he noted, were materials, healthcare, and energy. Goldman Sachs Group Inc. recently recommended a similar strategy. (For more, see also: 12 Stocks To Buy For Market's Upturn: Goldman Sachs.)

Bottom Reached, Technicians Say

Some technical analysts believe that the market has reached bottom, CNBC says. Hopeful signs for them is that the S&P 500 closed above its 200-day moving average on February 9, and above its 100-day moving average on February 12. Robert Sluymer, technical analyst at Fundstrat Global Advisors, also thinks that the index has bottomed out. However, he tells CNBC that he would reconsider if the index does not surpass its 50-day moving average, which was 2,720 as of February 13, and 2.1% above the close for that day, per

Unfazed Bull

Michael Wilson, chief U.S. equity strategist at Morgan Stanley, is unfazed by the recent correction. "One last surge of euphoria" among investors may bid price/earnings (P/E) ratios up towards 18.5 times EPS by mid-year, with the S&P 500 hitting 3,000 "before settling back down by year-end," per a note of his excerpted by CNBC. That would be an increase of 12.7% from the February 13 close, and 4.4% above the record high on January 26.

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