Stock Market Correction Worries Are Overblown. Here’s Why.
The market’s mind has been intensely one-tracked since its early-pandemic nadir. In the background, beyond the skyline of stocks pushed higher and higher by the Federal Reserve’s very visible hand, a storm is brewing.
The question is whether it matters.
This time of year is usually fraught for the stock market, and this year it has been especially so. The
S&P 500
is already down more than its historical September average. In the context of year-to-date performance, though, September’s decline has barely been a blip, and the U.S. stock market looks unshakable. The flood of liquidity from the Fed and U.S. Treasury has left a lot of people with more money than they know what to do with, and thus U.S. stocks have had nowhere to go but up.
That’s true, of course, until the moment it isn’t. Many strategists say it’s a matter of when, not if, the stock market corrects. It has doubled since bottoming on March 23, 2020, without a single decline in excess of 10%. They say correction is due because the party has gone on too long and the list of could-be and should-be triggers is too daunting.
“The issue is that the markets are priced for perfection and vulnerable,” says Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. She predicts a 10% to 15% pullback before the end of the year but ultimately sees the economic cycle and bull market remaining intact.
Covid-19 hospitalizations are rising, and consumer confidence is plummeting. Geopolitical risk is building after the U.S. departure from Afghanistan and China’s regulatory crackdown. Price inflation isn’t relenting. The latest debt-ceiling fight will probably go to the 11th hour, raising the specter of default or a rating downgrade.
Most importantly, fiscal and monetary policy are on track to tighten concurrently, just as economic growth slows sooner and faster than predicted. Tax increases are coming, and fiscal stimulus is fading, while chances are rising that the Fed will this year start reducing the monthly bond purchases it started to support the economy early in the pandemic.
The problem with the correction narrative is that none of this is new. Call it information overload, apathy, or calculated dismissal. Whatever it is, investors aren’t blind; they just haven’t seemed to care. That alone is reason to question the growing warnings. Why now?
There is one reason that investors have been able to tune out the alarm bells, and it’s a good one. Fed Chairman Jerome Powell has succeeded so…
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