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Neil Hennessy: ‘Get in Front of a Correction’

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Neil Hennessy’s advice for 2018: “Get in front of a correction that’s coming.”

This doesn’t mean the nine-year bull market’s over, he added, during a presentation of his 10th annual Hennessy Funds Market Outlook for press in New York. In fact, the chairman and chief investment officer of Hennessy Funds thinks the Dow Jones industrial average is building toward the 30,000 mark.

According to Hennessy, today’s market reminds him “exactly of the 1982-2000 market.”

“That was a great, great 18-year run,” Hennessy said. “But what ended that market?”

It wasn’t the 1987 crash, or the real estate crash, or even the dot-com bust in 2000. According to Hennessy, it was the euphoria in the marketplace.

“You had the taxi drivers in New York telling you what dot-com stocks to buy,” he said.

But Hennessy doesn’t see this today.

Once everybody starts talking about something, or investors all want to go one way, market euphoria may be upon us, he says.

Since he hasn’t seen those signs, he says, there’s still room to go higher. He thinks the Dow is heading to 30,000 and beyond.

That’s one reason why he thinks the bull market is “here to stay.” Another reason is that corporate profits are still strong, and, according to Hennessy, a small interest rate increase won’t hurt the economy or corporate profits. Hennessy also thinks growth will remain low but consistent.

Despite his near-term optimism, he also warns that advisors and investors need to get ahead of the inevitable correction.

Since 2010, there have been 18 Dow slumps, 14 of which were over 5% and four of which that were over 10%. The last 5% correction occurred from September to October 2014, and the last 10% correction occurred November 2015 to February 2016.

Brian Peery, Hennessy’s Cornerstone MidCap 30 fund manager, says he’s waiting for a correction “like everyone else.”

“I’m not looking at it and saying the market’s overvalued. I think it’s fairly valued,” he said. “But I’d love to see a correction so that I can say ‘Look we’ve had it; it’s behind us, now here’s my entry point for those who haven’t participated.’ I think that’s what we’re waiting for.”

The concern that Peery and Hennessy have is what will happen to investors in passive funds and exchange-traded funds.

“I’m not sure what the impetus is going to be, but when [the market] corrects, you’ve got to understand that all these index funds all own the same companies in the exact same percentage and they don’t use limit orders,” Hennessy explained. “That means they’re going to sell. And once the selling starts, it’s going to beget more selling, which is going to beget more selling.”

And Perry adds that if he’s looking at a 10% correction, he wants to be a buyer, not a seller.

“The question is do you see if that correction happens, and when it happens, what’s going to happen to all these ETFs that are following all the same things?” he said. What’s going to happen to the individual who’s been [told] for so many years that you need to stay in the market and participate long term? Do they now take that advice? … It’s a little bit of an unknown and we’ll wait and see.”

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