News Column

As stock markets jitter globally, is there a chance of a significant August correction?

August 4, 2014

YES Andrew Goldberg Markets have now enjoyed more than 1,030 days without a 10 per cent correction - an unusual, but not unprecedented, rally (this is the third time in 25 years). While this in itself doesn't suggest an imminent correction, it is fair to say that the powerful anaesthetic of extreme central bank intervention has acted to numb the market to some of the potential pitfalls. This unusually sanguine market behaviour means that any unexpected event or negative news might be met with a sharper knee-jerk reaction than would otherwise be the case. Investors should be on guard for a correction. However, we still believe that easy monetary policy (despite some tweaks), improving global growth, and slow-but-steady corporate earnings growth will continue to make this a market of higher highs, and higher lows. So any meaningful correction should be viewed as healthy, and perhaps even an opportunity to add to shares at a cheaper price.

Andrew Goldberg is a market strategist at JP Morgan Asset Management.

NO Bill O'Neill We're already pretty close to a 5 per cent correction on Wall Street, but a big correction of around 10 per cent is more difficult to argue. We'd need one or more significantly negative development in coming months. One is a shift in stance at the Fed toward less accommodation, which is unlikely given labour market slack. We have also not seen any evidence to back up the concerns around US earnings in second quarter reports. An increase in the risk premium, driven by geopolitical events around energy supplies, won't last on a sustained basis. A China slump would be a much bigger threat, but again that risk appears to be dissipating for now. We see several upside risks for US equity markets visibly playing out, from improving housing fundamentals to the acceleration of dividends and share repurchases. It is also worth noting that, since 1950, the S&P 500 has rallied 13 per cent on average in the 12 months before a first rate increase.

Bill O'Neill is head of the UK investment office at UBS Wealth Management.

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Source: City A.M. (UK)

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