What You Need to Know
- David Kelly of JPMorgan Asset Management expects a correction within the next year.
- Ben Inker of GMO warns that the market is in a speculative bubble that is likely to deflate before long.
- DoubleLine's Jeffrey Sherman says the biggest risk to the equity market is inflation.
The S&P 500 and Nasdaq hit new record highs Monday, continuing what appears to be a never-ending rally in U.S. stocks. When will the market crash? Is there a correction brewing, or does the rally have room to run?
Year to date, the S&P 500 has gained 14.3% while the Nasdaq and Dow Jones Industrial Average (DJIA) are each up 12.4%. That follows strong gains last year, especially in the Nasdaq, which soared 43.2% despite a raging pandemic.
The S&P 500 gained 16% and the Dow rose 7.3% in 2020. By late 2020, all three major indexes were apparently focused on a future with coronavirus vaccines that could at minimum tame the pandemic and hopefully eradicate it.
The pandemic has been tamed in this country as a result of vaccinations. Sixty-three percent of Americans 12 and older have received shots, but only 54% are fully vaccinated, according to data from the Centers for Disease Control, and the Delta variant, which is more contagious, is spreading here.
Meanwhile, the S&P 500 hasn’t had a 5% correction based on closing prices since the end of October, which makes some market participants jittery. Is the stock market in a bubble verging on bursting, making way for a full-out crash? Is a 5%-10% correction more likely, or, better yet, a continuation of the rally?
ThinkAdvisor asked a number of market experts for their analysis of the current market and their expectations for what happens next. Check out their answers below.
David Kelly, Chief Global Strategist, J.P. Morgan Asset Management:
“The overall U.S. equity market is expensive, with the S&P 500 selling at 21x forward earnings compared to a 16.7x 25-year average.
A correction is likely within the next year. However, it is impossible to say when it will start, when it will trough or how much of a decline we will see. … Because of current relative valuations, mega cap stocks and growth stocks are more vulnerable to such a correction while U.S. value stocks and international stocks should fare better.”
Jeffrey Sherman, Deputy Chief Investment Officer, DoubleLine Funds:
“The U.S. stock market is currently trading at a multiple of 37 on the Cyclically Adjusted Price-to-Earnings ratio. … A level U.S. stocks have exceeded only once in history —1998-2000. … The stock market appears to be rich … [but] when you strip out the top 10 companies by market capitalization, the valuation screens significantly cheaper.
“Given the amount of liquidity within the financial markets, the support from the Federal Reserve and the consumer remaining flush with multiple government stimulus packages and unemployment benefits, it is hard to see a near-term catalyst for a market crash… .
“Historically, market crashes have corresponded to an over-leveraged economy and bond defaults; those risks appear benign given the economy is currently reflating ….The biggest risk to the equity market is inflation. In the next six months we will know whether the recent inflationary data is transitory or the beginning of a higher inflation regime.
“We have witnessed a rotation within the equity market to names that benefit from the reopening of the economy as well as some of the more traditional value names. I believe that this trend will continue over the next 12-24 months as the multiples for these names trade significantly cheaper and continue to benefit as the U.S. returns to some semblance of normalcy.
Stephanie Link, Chief Investment Strategist and Portfolio Manager, Hightower:
“The stock market is not in a bubble, but there are pockets worth paying attention to — Bitcoin and meme stocks, for example. These areas should not deter the other parts of the market where fundamentals matter and are solid.