Weak Wall Street Expectations Imply Stock Market Correction Is Coming
CNBC Fed Survey Responses Feature Mixed Bag of Fear And Caution
The market participants have spoken. According to a new CNBC Fed Survey, Wall Street economists and analysts aren’t sounding too giddy. Calling their views “grim” may be overdoing it, but certainly their market forecasts imply that a stock market correction is a given. The results of this survey are something that every serious investor should ponder.
The survey shows an assortment of views on fiscal policy and where it is going. Notably, “the terminal rate,” which is the level at which the Federal Reserve is expected to stop hiking interest rates, fell from 2.9% to 2.7%. Most of the other survey responses weren’t unusual. Overall, there were few head-turning surprises that jumped out at me. The exception: expectations of stock market returns for the rest of 2017.
If the experts are correct, a U.S. stock market correction is a foregone conclusion. Collectively, the surveyed group said they anticipate that the S&P 500 will rise less than one percent during the rest of 2017. Said Moody’s Analytics chief economist Mark Zandi, “Asset markets are very highly priced and investors are complacent. The pre-conditions for a significant correction in markets are coming into place.” (Source: “Wall Street bracing for ‘significant correction’: Survey,” CNBC, July 25, 2017.)
In my view, a less-than-one percent rise implies that the next stock market correction will be shortly upon us. Why? Because the markets oscillate back and forth, from one extreme to another. Low volatility aside, it’s not realistic to expect the market to flatline in stationary fashion for the next five months.
For a correction (defined as a peak-to-trough decline of 10%–20%) to not happen, either the experts would have to be wrong or the market would have to just stall out at the top. While it’s possible that the former is true, the latter is quite unlikely. Markets don’t just “stall out” at record-breaking multiyear highs.
While I don’t think the pundits are issuing a Wall Street crash warning, I do think they are implying that there will be a correction. A tepid U.S. economic outlook 2018, combined with extreme equity valuations, are creating pause on Wall Street. Many believe that the next recession will happen sometime in 2018.
Constance Hunter, chief economist at KPMG, is among them. She believes that economic conditions are on the cusp of deterioration. “The economy is in the eighth inning, said Hunter. “Nevertheless, I expect we tip into a mild business cycle recession sometime in late-2018 or mid-2019.”
I’m sure she’s not alone. I am among the voices who believe that the sun is setting on this current economic expansion. And if I’m right, the stock market will not be a good place to be.