Likelihood of a U.S. Stock Market Correction Grows to 70%: Vanguard
The likelihood of a large-scale correction in U.S. stocks is on the rise, according to researchers at Vanguard Group. While there is always risk of a correction on Wall Street, the risk is running much higher than normal following 12 months of record-setting gains.
Vanguard Forecasts Dark Clouds Ahead
Researchers at the asset manager say there is now a 70% chance that U.S. stocks enter correction, a technical term that refers to a 20% drop in prices from their most recent peak. Although Vanguard isn’t trying to scare investors, market participants need to be prepared for a potentially painful correction.
“It’s about having reasonable expectations,” Vanguard’s chief economist Joe Davis said, as quoted by CNBC. “Having a 10 percent negative return in the U.S. market in a calendar year has happened 40% of the time since 1960. That goes with the territory of being a stock investor.” He added, “It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue.”
The asset manager recently told investors to lower their expectations over the next five years as the market cools from the post-election euphoria. Over that period, stock market returns should average roughly 4% to 6%. That’s the most tepid outlook for stocks in the post-crisis era.
At the same time, Vanguard expects international stock markets to outperform Wall Street. There are clear signs that portfolio managers have already taken notice of this trend, based on recent surveys of asset allocation. A synchronized global recovery and the slow removal of policy accommodation in key jurisdictions suggest it is blue skies ahead for international markets.
Vanguard manages roughly $5 trillion in assets across mutual funds, ETFs and retirement plans. As of 2016, it was the world’s second-largest asset manager behind BlackRock.
Hope Rally Continues
So far, Vanguard’s projection hasn’t shown any sign of materializing. U.S. stocks have been on an tear since Donald Trump secured the presidency in November 2016, as investors rallied behind the promise of a pro-growth agenda. The year-long rally has added more than 23% to the Dow, 18% to the S&P 500 and 28% to the Nasdaq Composite. All three Wall Street barometers have secured multiple record highs this year.
The Trump rally has slowed this month, with market participants evaluating the latest proposals to overhaul the tax code. The president is aiming to pass to new tax legislation before Christmas, giving his administration the leg up in a critical year that features mid-term elections.
Some analysts believe the Trump bull market may continue indefinitely over the next two years as the U.S. economy shows signs of progress and corporate earnings continue to recover. That being said, concerns of overvaluation risks loom large in investment circles.
The power of the Trump rally has been reflected in another important indicator used by Wall Street: the CBOE VIX. The so-called “investor fear index” has spent the better part of the year at half its historic average, including multiple stints at record lows. The VIX trades on a scale of 1-100, with 20 representing the historic mean.
Disclaimer: Writer is invested in U.S. equities at the time of writing.
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