High Valuations, Little Stimulus. Time For A Pullback?

Sebastien Callebaut -

The Leuthold Group Sees A 10 To 15% Correction

Due to high valuations and less supportive Federal Reserve policies, Jim Paulsen of The Leuthold Group forecasts a 10% to 15% fall next year. However, due to ongoing solid GDP and profit growth, he anticipates a large market setback to be temporary.

“We are way overdue for a correction, and we’re going to get one, [...] I would be trying to diversify away from the S&P 500, which I think might take the brunt of it.” Jim Paulsen on CNBC
  • His S&P 500 estimate for next year is 5,000, implying an 8% rise
  • Small and mid-cap equities, cyclicals, and emerging markets, according to Paulsen, will be the largest winners

Meghan Shue From The Wilmington Trust Also Sees A 10% Pullback

The increase in stock market volatility could still be in its early stages. Despite an optimistic prognosis for 2022, Meghan Shue of Wilmington Trust anticipates wild swings to increase as markets digest a less flexible Federal Reserve and consider additional risks associated with the Covid omicron variant. In her base case, equities could correct by as much as 10% in the following two to three months.

“While we’re overweight to equities, we’re holding elevated cash because we think there are probably going to be more opportunities presenting themselves, [...] Cash could be your friend over the coming months.” Meghan Shue on CNBC
  • However, Shue, who manages $152 billion in assets, refers to it as a buying opportunity
  • She is bullish on both domestic and overseas markets as her firm expects inflation to stabilize, supply chain pressures to lessen, and labor market participation to increase

BENCHMARK'S TAKE

  • Valuation haven't come down in the past months as a Value and FANG-lead rally pushed stocks higher despite an increasingly tighter environment, continuing supply chain hurdles, a tight labor market and the resurgence of new COVID variants
  • While it is extremely hard to time a correction, we believe the next 2 to 3 months may be challenging for investors as the lack of a positive catalyser may prevent stocks to reach substantially higher
  • However, we also believe that any pullback could be limited to a 15% decline in stocks so as to bring valuations more in line with historical averages and offer a better risk/reward ratio to investors seeking to enter the market
  • Despite the risks of a pullback, we still prefer avoiding timing the market

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Erwan Hesry on Unsplash.