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Investors look for signs of a coming market correction

Investors fret over the sustainability of a rally that has pushed the US Dow Jones index to a record high.

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by Chris Marshall on Mar 06, 2013 at 16:30

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Investors look for signs of a coming market correction

Consider stockbrokers’ popularity at cocktail parties and watch the lower-brow newspaper front pages if you want to gauge how long this stock market rally can last before the widely anticipated ‘correction’.

Though those clichéd signals that markets are over-hyped – party-goers seeking share tips and the FTSE on the front page of the Daily Mail – aren’t quite flashing yet, investors continue to fret over the sustainability of a rally that has pushed the US Dow Jones index to a record high.

Unusual underpinning

After all, this rally is built on strange foundations: the financial crisis led to huge stimulus programmes, most notably the US Federal Reserve's quantitative easing programme, which will continue to prop up markets.

This ongoing stimulus created negative real interest rates (that is, after inflation). Finance professionals say the subsequent hunt for yield is drawing not only seasoned investors out of bonds and cash and into equities, but also previously unblooded punters.

Major investment houses including BlackRock are aiming advertising campaigns at exactly these people.

‘It is part of the great rotation’, says Tom Elliott, global strategist at JP Morgan Asset Management. ‘Many investors faced with UK 10-year gilts at 1.973% or looking at RPI at 3.3% are saying “I’m losing 2% or so in real terms”. So they’re being forced in order to safeguard capital values to go into higher-risk products.’

According to Matt Basi, a trader at CMC Markets, the poor returns on other assets mean ‘fund managers are sitting there watching market tick up, thinking “if I want to make a return for investors this year, I have to own stocks”.’

Small economic improvements

There are at least some traditional ‘fundamental’ reasons behind the rally. The big concerns holding back investors prior to the rally have all abated to varying degrees: China’s economic hard landing, the eurozone crisis and the US fiscal cliff.

But those improvements aside, some risks are being overpowered by market exuberance. The fallout from the inconclusive Italian elections was short-lived. And even the inability of US politicians to prevent the ‘sequester’, ushering in $85 billion of spending cuts, hasn’t fazed markets.

‘Most people are still trying to actually weigh up what the impact would be on GDP and on markets,’ says Basi.

But essentially, as Elliott says, ‘no one is really bothered’ by the GDP-sapping sequester. ‘What’s really important to note is you’ve got fundamental self-sustaining growth coming from the US,’ he says, pointing to rising employment, a commitment to keep interest rates low and rising house prices.

So investors in the US – unlike those in the UK – have the luxury of both the ‘push’ of negative interest rates and the ‘pull’ of real economic growth, as Elliott puts it. For that reason, at least in the short term, US small company shares (which are more exposed to the economy) are set to outperform, he reckons.

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23 comments so far. Why not have your say?

Not while Ben's printing.

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Where were the so-called experts when the markets plummeted in 2008/9, surely if the market looks attractive now then 4/5 years ago it must be highly attractive then but no, they went and sell further!

Mantra 'sell high buy low' so if they should wait for the correction before recommending and NOT chasing it now.

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The experts and media talking heads have been telling anyone prepared to listen that it would all in end in tears Eurozone break up China hard landing fiscal cliff Muni bond catastrophy, financial tsunami, grexit, fiscal cliff, financial armageddon, sequestration on and on and on. Gues what now the market is at an "all time high" and now we are bound to get a big correction. Look the heavy lifting for what it is worth has been done by a handfull of stocks illustrating that Dow as index is about as respresentative as the FTSE. They are not! finacial pundits and a lot of so called financial gurus have got it plain wrong and through their hysteria managed to keep a lot of nervous nellies on the side lines. Sure if you keep shouting sell long enough you may get a correction and be able to claim as they never seem to fail to at infinitum " when I was on your programme blah blah blah I suggested blah blah blah. FUNNY. we have NOT seen a broad based rally strip out big oils and mines we are still a long way from the top/. Stocks like TW have gone up almost ten fold from their lows does that mean that they have gone up too much Come on. Institutions are only just piling in! It is a stock pickers market now and has been since March 2009. All of a sudden the gurus, 2 and 20 boys and a lot of fund management experts look very very ordinary and as such should not be surprised to see funds walk out of the door.

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The so called "gurus" have no more idea than you do!! How many tell you their past track record over the years, I will hazard a guess, Eh? "NONE"!!!

Markets are not rational and to try too suggest they are is "nonsense", prediction is a "mugs" game (unless you are a television pundit, making money out of it)..

I am with Warren Buffett on this one, I ignore the markets and concentrate on my own buy/sell strategy. It has worked in the past ups and downs and I expect it to work in the future.

Noi doubt there will be the usual casualties, i.e those who bought at the top and sold at the bottom, but that's life, as they say.

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I'm yawning writing this. The markets rise, everyone panics!

I have no idea whether the markets will rise or fall, I shall just continue with my strategy of long-only investment trusts/companies rolling up the dividends.

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When people are greedy it is time to be fearful. When people are fearfull it is time to be greedy. So says Warren Buffet.

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I also add to my investments monthly to benefit from pound-cost averaging, a much under appreciated strategy. Lump sum investment is ok when p/e ratios are cheap or reasonable as at present.

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The downside tailwinds will probably impact the upside value trend as the average peak prices recede from the cost :value quartile during the next couple of days (it was ever thus).

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I can always find a share worth selling.

I can always find many shares worth buying.

Who could ask for anything more?

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No market can defy gravity for ever, a correction always eventually occurs. The art, which alas I do not possess, is to get out prior to the fall.

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There are always shares worth buying and shares worth selling....learning to read the charts .read the fundamental news....happy trading...I am not short selling UK Shares.....!

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What dogdays is doing is stating a simple truth about markets in pompous language. For "a correction always eventually occurs" read a translation into plain English "share prices go up and down".

A rational investor will exploit this. In the last big "correction" (2008-09) I was able to make many extremely profitable additions to my portfolio. A rational investor exploits the natural volatility of share prices. It is the non-investors, the timid doomsters, that I feel sorry for. The "stick with (depreciating) cash until the crash" brigade.

They are standing at the bus stop letting bus after bus go past. As I see it we are still in the early stages of recovery from that last "correction". I have mentioned recently that I regarded Vodafone as undervalued, and was buying - my holding is now valued in six figures. Yesterday, in one day, their value rose by nearly 7%. Now that certainly beats the current deposit rates, doesn't it?

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Vodafone may merge with a US company but it's very much early days for this and it might not happen. If it does not happen the share price could well go back down very considerably. In addition to this, their ability to pay dividends going forward is questionable. Neil Woodford has sold out of Vodafone for that very reason.

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So Neil Woodford has sold out of Vodafone. I'm doomed.

Seriously though, David, if Vodafone goes down "very considerably" I will buy more shares. And if it goes up "very considerably" - just as likely - I will start slicing off some profits.

Shares go up and down. Isn't life great.

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@Tony Peterson

Guess your a happy chappy then. Wish you well.

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David West

Thank you for your good wishes. I am indeed extremely happy. (Just wish I was a bit younger.)

May you prosper too.

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Chris Marshal has a cheek calling the Daily Mail 'low brow' ,when you consider the usual quality of his output.

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Many nervous investors on the sidelines have missed a 25% rally just in order to avoid a 10% correction........doesn't make a lot of sense.

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bob,

Why are you so interested in other investors making money?

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Geoff

Do I detect a whiff of sour grapes?

Bob

Those nervous non-investors will miss the next 25% rally too. Waiting, no doubt for the crash, the asteroid, Godot or Jesus. But miss they will.

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@ bob woodhouse

Hi Bob

Whilst I do not disagree with you I think it is important to remember an individuals circumstances and also the way in which the rise in stocks happened since January.

I have a sizable portfolio that I have built up over many years and so therefore I do not consider that I have missed out on the rally. However, the markets went up so fast in January that it took everyone by surprise - experts and novices alike - and therefore investing new money to try and catch up seemed to me not the safest thing to do.

I'm not sure if you are correct in saying that the market has gone up by 25%. It seems more around 20% to me but I take your point. However, I think it probable that there will be a correction of some sort before the summer whether it will be 10% or more or less.

Whenever that correction comes is the time I shall put new money into my portfolio which since I missed the rise in January seems the most sensible thing to do.

I am reminded of a saying by Warren Buffett namely "Be careful when other people are greedy and greedy when other people are careful". There is nothing wrong with missing out on one rise if you are playing the long game. For instance, look at Neil Woodfords Invesco Perpetual Income Fund. He has missed several rises but over 10 years his performance is one of the best.

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Tony,

I have never indicated I missed anything. My point is simple, if you or anyone else has found a way of getting rich why do you want to help others. If I found a gold seam at the bottom of my garden I wouldn't tell you. LOL

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Tony Peterson

Mar 10, 2013 at 12:58

Geoff

That's the difference between us. I enjoy providing useful information for my fellow humans.

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