Analyst Predicts 5% to 10% Correction Necessary for Stock Market

Analyst Predicts 5% to 10% Correction Necessary for Stock Market

A correction in the US markets is predicted by some analysts.

Whether it is likely or not, a correction is crucial if the stocks must keep rising.

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Online trading brokerages are encouraging many people to start stock trading. But the ebbs and flows of the market need to be monitored as well, so as to plan effectively and make the right decisions. That requires close observation and following the insights of experienced analysts, because it could get confusing sometimes. The general consensus among analysts is what you need to look for, and they usually have solid reasons to back up their theories.

Experienced analysts believe that a 10% correction is needed in the US markets if the stocks must keep rising. The equity markets have been in an upward surge following the plunge to the negative by last year’s end. The comeback has been fine and rosy till now but analysts are pointing to a pullback, a major correction. This is particularly suggested as a result of the S&P 500 having climbed over 18%, as of February 25, from the lows of December 2018.

Correction Trigger Factors One of the analysts, Steven DeSanctis of Jefferies, suggests that factors such as profit declines, rich valuations and slowdowns in some of the major economies could get a correction triggered.

DeSanctis provides a correction range of 5% to 10%. The major catalysts he points out for correction are an economic slowdown affecting the US, Europe or China, reduced earnings estimates, earnings declines, the weakness of the trade deal between the US and China, and rich valuations.

What Investors Need to Look Out For Investors therefore need to watch out for some of the following circumstances. The equity markets have surged recently, and Investopedia’s Matthew Johnston attributes it to the good news about the dovish tone of the Federal Reserve and the trade talks progression. All these factors are helping investor confidence in spite of signs of retarding economic growth in some of the largest economies in the world. These growth slowdowns, in fact, are spreading skepticism among analysts regarding how far the current equity rally will keep climbing.

Trade Talks and Valuations 

The future prospects of the US-China trade talks are essential. If a resolution isn’t likely within the expected time, a pullback couldn’t be unlikely says Art Hogan of National Securities. A pullback could occur just by equities touching the earlier resistance levels,

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says Johnston. So there need to be indications that economic growth has picked up again for stocks to push past those earlier levels. 

Valuations are another catalyst that DeSanctis considers are likely to trigger a pullback.

The Wall Street Journal recently reported that the S&P 500 stocks were trading at roughly 20.2 times forward earnings. That’s a higher figure than where they were trading in August. But it is an even higher figure than where they were at the end of last year – 16 times forward earnings. If the stocks slip to somewhere around 17 times, DeSanctis believes the stocks would appear much more attractive than where they are at their present level.

Johnston balances the expectations though, by stating that these market correction warnings could end up being too optimistic. He reckons markets could get to a stage beyond correction as a result of any of the factors mentioned above – declining earning, retarding economic growth, trade talk breakdown and rich valuations. That could result in markets plummeting to a free fall situation. But overall though, the mood seems to be positive among analysts.

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