Stocks are poised for a drop of up to 12 percent after a stormy start to the year, a Wall Street veteran has warned.
Global stocks hit record highs on Wednesday – ahead of a day off from trading for yesterday’s Juneteenth holiday.
The gains in the S&P 500 and the Nasdaq were driven by a rally in technology stocks, which also made AI chipmaker Nvidia the most valuable company in the world.
Overall, it’s good news for investors, including Americans whose retirement savings are largely invested in US indices.
But analysts warn that stocks won’t continue to rise – or at least they will need a ‘correction’ before they do.
Sam Stovall, chief investment strategist at CFRA Research, warns of a stock market pullback
“I’m increasingly concerned that we may have to endure another decline of 5 percent or more before the year is out,” Sam Stovall, chief investment strategist at CFRA Research, told Yahoo.
He described the potential downturn as a “resetting of the dials” or “digestion” after a heavy meal.
The S&P 500 is up more than 10 percent in the first quarter, which Stoval said was the index’s 11th-best first-quarter return since World War II.
But he pointed out that 14 of the top 15 returns were followed by declines of at least 5 percent or more – with some slumps of more than 12 percent.
A 5 percent drop would lower the S&P from 5,487 points on Tuesday to around 5,212, matching levels seen in early March.
A 12 percent decline would push the index to 4,828, where it traded in January.
Stovall pointed to a “silver lining”: After a strong first quarter, the S&P 500 tends to end the year at least 20% higher on average.
This means that every pullback acts as a breathing space before the market marches on again.
Stovall, who was S&P Global’s chief investment strategist for 27 years before joining CFRA in 2016, could also trigger a pullback.
These are often unpredictable events, such as a war or bank failures, markets rising too quickly and becoming overloaded – which many believe has happened this year – or the fear of a recession.
A crash would also impact U.S. retirement accounts. Most have at least a portion of their 401(K) and individual retirement accounts invested in the Dow Jones, the S&P 500 and the Nasdaq.
JPMorgan Chase CEO Jamie Dimon has said he cannot rule out a ‘hard landing’ for the US
In recent weeks, top bankers and even a prominent former CEO have issued chilling warnings about the US economy.
Jamie Dimon, head of the world’s largest bank, JPMorgan Chase, said this in May the worst outcome for the American economy would be ‘stagflation’.
This is when inflation continues to rise, but unemployment is high and growth is slowing.
Economists consider stagflation, last seen in the US in the 1970s, as worse than a recession. It would drive down stock prices, hitting 401(K)s and other retirement savings.