Did last week's harrowing stock market downdraft signal a pullback, a coming correction or the beginning of a bear market?
USA Today turned to Wall Street pros to try to answer that confounding question.
The general consensus of a dozen experts the newspaper interviewed was that current market turmoil will be short-lived and the losses will top out at less than 10 percent. The reason given was that the risks usually associated with a sharper decline are not evident at the moment. But, of course, that could change.
Perhaps the strongest case that the recent decline will be limited to only a pullback, defined as a decline of less than 10 percent, involved the fact that the economy remains strong.
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Nick Sargen, chief investment officer at Fort Washington Investment Advisors, stated, "The latest news has been encouraging. The economy improved in the second quarter and is off to a solid start in the current quarter. Inflation has edged higher but wages are moderate, which should keep the Fed on hold."
In his argument for the market experiencing just a pullback, Bob Doll, chief equity strategist at Nuveen Asset Management, noted, "Significant declines usually are caused by downturns in earnings, something that has very low probability."
Russ Koesterich, chief investment strategist at BlackRock, suggested the threat of a spike in interest rates — another factor that could lead to a sharper equity fall-off — might be overrated.
"Our expectation is that the economy continues to stabilize and, while rates are likely to move higher, they do not 'melt-up,'" he predicted.
The case for a correction, defined as a stock decline of between 10 percent and 20 percent, was made by Uri Landesman, president of Platinum Partners. "The market is extended and expensive. It is not discounting bad news. The technicals suggest that you will have a move into the correction category," Landesman said.
USA Today's survey of Wall Street pros found a couple who were solidly in the bear camp — i.e., they are looking for a decline of more than 20 percent.
Axel Merk, chief investment officer at Merk Investments, said, "One of the Fed's key achievements is that risky assets don't appear so risky anymore. . . . In my assessment, there is little chance earnings can expand at fast enough a pace to justify valuations once fear comes back to the market."
Walter Zimmerman, senior technical analyst at United-ICAP, said that among the most worrisome developments now is "risk blindness" by overly exuberant investors, as evidenced by historically low yields on junk bonds and overvaluation in pockets of the stock market, such as small-cap stocks.
Zimmerman, who believes a bear market is coming, said the rapid pace of corporate buybacks and merger-and-acquisition activity are also signs of froth.
Tobias Carlisle, author of the
Greendbackd blog and founder of Eyquem Investment Management, noted that just because the current bull market has gone on for an extended period — since 2009 — does not mean it must end soon.
He looked at data from U.S. bull markets back to 1871 and concluded, "I don't believe that there is anything predictive about the duration or magnitude of the average and median bull markets."
The two longest bull markets in history — those from 1975 to 1987 and from 1988 to 2008 — each lasted 153 months, Carlisle said. The current bull market is only 65 months long by comparison.
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