2014, so far, is looking nothing like stellar 2013 for stocks. But does that mean a correction is coming soon?
The U.S. stock market continues to forge new highs, but the upside momentum doesn’t seem to be inspiring the same level of confidence investors had in 2013, when U.S. stocks rallied about 30 percent. Instead, there’s brewing dissension on whether the stock market is headed for a significant correction, or whether more upside lies ahead.
Some argue that the divergence in performance between small-cap and large-cap stocks this year is an indication that the now-five-year U.S. stock rally is perhaps long in the tooth. Small-caps are often considered to be more in tune with broad domestic themes, and therefore react more readily to changing macroeconomic environments than their larger-cap counterparts.
Consider the performance of the SPDR S&P 500 ETF (SPY | A-97) and the small-cap-focused iShares Russell 2000 ETF (IWM | A-84). Year-to-date, the dispersion in their total returns already exceeds 7 percentage points.
Chart courtesy of StockCharts.com
Some See More Room To Run
On the flip side, there’s a school of thought that argues the market has much more room to run, because the U.S. bond market is in no way pointing to a bear downturn—characterized as a pullback of at least 20 percent. History shows that bear markets tend to take shape when the yield curve inverts, and short-term rates move above long-term rates.
“Every recession over the past 50 years was preceded by the Fed hiking rates enough to invert the yield curve,” Jeff Kleintop of LPL Financial said in a recent blog for Business Insider. “That is seven out of seven times—a perfect forecasting track record.”
“The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about five to 16 months,” he added. “The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits.”
That inversion is nowhere in sight, and some—like Kleintop—don’t expect it to materialize at least until 2017.
With all this in mind, we asked three macro-thinking advisors a single question: Are you anticipating a major correction in the stock market soon, or is the bull market intact?
Here’s what they had to say: