- Posted in: Market Watch
Over the past 18 months, investors have enjoyed a remarkable run with stock prices up by nearly a third. As of Tuesday, the stock market has spent 281 trading days without a 5 percent pullback, and 375 trading days without a 10 percent correction. This is pointedly longer than the typical 50-day streak for a 5 percent pullback and 167-day run for a 10 percent drop.
In addition, the S&P 500 has gone 199 days without suffering a 3% drop. This is the second longest stretch since 1950, and it has experts concerned about the possibility of a significant correction in the very near future. A correction is defined as a decline in stock prices that is greater than 10%.
Although there are many historical situations where stocks decline and the economy keeps chugging along, a significant correction is far more likely in the current environment. The stock market is currently overvalued (meaning that stock prices are much too high), even though the outlook for corporate earnings is good and being powered by solid revenue gains. The red flag is that this is the only time in the past half century that stock prices have been so highly priced; the one exception being the tech bubble prior to the 1987 market crash.
Ron Paul, the former Republican Congressman from Texas, agrees with this view and believes that escalating dysfunction in Washington will cause even more problems on Wall Street. While he doesn’t believe that the dysfunction lies completely at the feet of Donald Trump, he does see it as resulting from problems that have been neglected over the past 6 to 10 years. Specifically, overestimation of the strength of the economy, and the Federal Reserve keeping interest rates too low for too long are major contributors to the impending correction. Paul estimates that the condition for stocks could turn unpleasant very soon, and will cause the most damage to businesses who are depending on reforms like tax cuts and reduced regulations.
This skepticism is rooted in the apathy of lawmakers toward making changes while the economy is in a state of growth. Now, they must sanction some form of budget action or risk shutting down the government completely. The global financial system could also suffer if the Treasury debt limit is not raised soon. Tax reform would be nice, but odds are that if there is reform, it will prove to be insufficient, and fall miserably short of what investors are hoping for. Ron Paul predicts stocks may drop by 50%, as he recently shared on CNBC.
JP Morgan recently warned that an expected drop in the S&P could cause a combination of policy shifts, political turmoil and geopolitical tension. With JP Morgan advising clients to hedge or reduce exposure, and interest rates rising in the Nasdaq, it is hard to see investors being enthusiastic about stocks. Most experts agree that a stock market correction is inevitable, but there is really no way to predict when. It could happen tomorrow or next year, which is causing tensions to escalate, and may result in Paul’s forecast of a 50% drop.
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