There could be a 10% correction on the horizon, but this strategist says investors shouldn’t worry too much and should be prepared to buy on any market weakness. Here’s why.
Stocks look set to close out their best week since November, with the S&P 500 and Nasdaq both closing at record highs on Thursday on the heels of better-than-expected jobs numbers and upbeat earnings reports.
The Dow also rose 1.1% to close near its session high, with the three main indexes all rising for the fourth straight day.
Thursday’s labor market data showed “further momentum” in the ongoing economic recovery amid the coronavirus pandemic, said Charlie McElligott, equity derivatives at Nomura, adding that its “driving another blast of risk-on [moves] into equities.”
But despite the strength seen in the market this week, Canaccord Genuity’s Tony Dwyer sees trouble on the horizon.
“We’ve been looking for a correction,” Dwyer said. “We’re in a slow spot.”
Dwyer is forecasting a 5% to 10% pullback in the market and it may already be underway. According to the firm’s chief market strategist, the pullback began in November as the reflation trade was peaking relative to the rest of the market.
“During the September swoon and the late October whoosh, that was the time to be getting aggressive and add exposure in the economic improvement trade,” Dwyer said. “Everybody started chasing that in late December and January.”
Dwyer isn’t the only one warning of a correction. Fudstrat Global Advisors head of research Thomas Lee said in a note this week that the firm is “altering our ‘base case’ for an S&P 500 peak in Feb-April and then a 10% correction.”
But even still, Dwyer isn’t turning bearish on the market, and warned investors not to overreact.
“A mistake people could make here is by becoming overly negative in anticipation of a correction,” Dwyer said, adding that monetary and fiscal policies—as well as low interest rates—make for a positive backdrop for stocks.
“The one that people don’t think about is the interest rate expense stimulus refinancing – refinancing your mortgage as a household or as a company refinancing corporate debt,” Dwyer continued. “That’s a big cost savings.”
And when down days do come, and they will, Dwyer is buying into groups that are likely to profit from excess liquidity and a synchronized global recovery, including emerging markets, small caps, cyclicals, and economically sensitive commodities like copper.
“You want to add exposure into weakness,” he added. “We’re early in this economic recovery.”