Column-Nagging thoughts of a stock market correction :Mike Dolan
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Trot out almost any macro market metric you care to think of these days and there appears to be a positive twist - at least for record high stock markets that have clocked up more than 10% gains for a first quarter that was marked at the outset by much investor angst and trepidation. U.S. stocks are expensive but not at extremes, it's argued, and earnings forecasts for next year are rising smartly to near 14%. U.S. economic growth is slowing a bit but recession this year now seems far fetched. Still-high interest rates are set to start falling over the summer as somewhat sticky inflation subsides again. And implied volatility gauges in stock, bond and currency markets are unusually subdued. The picture outside the United States may be patchier, but stocks in Europe or Japan are cheaper too and the economic growth nadir in both areas may already have passed. European rates may even start falling before U.S. equivalents. From the trough of last October's bond-related shakeout, the benchmark S&P500 has gained 25% in just 5 months. But the equal-weighted version of the index - which corrects for the outsized performance of leading megacaps - has jumped 23% in that time, Russell 2000 small caps have rebounded 26% and Japanese and euro zone blue chips are up 28% and 25% respectively in dollar terms. The most recent Bank of America global fund manager survey has stock allocations at two-year highs and the highest 'risk appetite' gauges since November 2021. Swiss asset manager Julius Baer's chief investment officer Yves Bonzon said he is starting to wobble on his still-overweight equities position - fearing a combination of herding consensus, a seasonal lull in equity demand over the summer and the upcoming U.S. election uncertainty. A 10-15% correction could happen at any time and would, I'd argue, be healthy. The assumption is that cash stash is there until the Fed finally starts to cut short-term interest rates - and futures have that penciled in for June. Then it starts to stream out to either bonds or equity. If the Fed were to hesitate in easing in the second quarter, then it could be a bumpy summer. AXA Investment Managers' Chris Iggo points out the average return of the S&P 500 in U.S. Presidential election years has been around 11%. And that's what it's done already in 2024. But 'if we are now in a benign growth cycle – then financial market returns could be more like their long-term averages,' he wrote. 'That means slightly higher for bonds than in recent years and slightly less for equities than over the last year. But good overall.'

#StockMarket #Correction #Equities #InterestRates #EconomicGrowth #Volatility #Investors

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