Tags: Kostohryz | stocks | Fed | dollar

Kostohryz: Economy, Dollar, Fed May Trigger 20 Percent Correction

By    |   Wednesday, 25 February 2015 06:40 AM

The S&P 500 index hit a record high, but plenty of experts say a major correction likely lies ahead.

James Kostohryz of JK Market Insights offers MarketWatch several reasons why stocks could drop 10 percent to 20 percent by July.

  • The economy. The recovery from the Great Recession is 67 months old, and historically we suffer a recession about every five years. To be sure, there have only been three recessions since 1982, which amounts to one every 10 to 11 years since then.
  • Strong dollar. The greenback has hit multi-year highs against a range of currencies in recent weeks. That not only hurts earnings by making our exports more expensive in foreign currency terms, it also dampens U.S. corporate profits by making the companies' foreign revenue worth less when converted to dollars. Many major companies reported that the dollar's surge substantially lowered their fourth-quarter earnings.
  • The Federal Reserve. The Fed is expected to begin raising interest rates around mid-year. And that could throw a major wrench into the equity market, which has benefited from the central bank's largesse. The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

Meanwhile, Carter Worth, chief market technician at Sterne Agee, predicts the S&P 500 will drop at least 14 percent from Monday's close of 2,109.66.

The index' nearly 10 percent drop in September-October represents "a foreshadowing of what the next one's going to look like — which is worse, by all accounts," he told CNBC.

"The further this goes without that kind of drawdown, the worse the inevitable drawdown will be. So we think we're not only going to visit 1,820 [for the S&P 500], we're going to go below that."

Tuesday, the S&P 500 gained 5.82 points, or 0.28 percent, to 2,115.48, a record-high close.

While the index hasn't seen a 10 percent decline since October 2011, "that used to happen all the time in normal markets," Worth said. Indeed, going back to 1946, 10 percent corrections occurred every 18 months on average until the most recent stretch.

He too mentioned a Fed rate hike as a possible trigger. "Once the Fed is done, this thing will not be able to stay," Worth said. "Once the student can't go to 'extra help' anymore, we're going to see how bad a student he really is."

Many experts cite frothy valuations as a bearish factor. "Right now we are a bit fearful that valuations are stretched," Randy Bateman, chief investment officer at Huntington Funds, told The Wall Street Journal.

The S&P 500's forward price-earnings ratio stood at 17.1 Friday, its highest level since 2004, according to FactSet. The index' trailing P-E ratio was 20.53, up from 17.71 a year ago, according to Birinyi Associates.

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The S&P 500 index hit a record high, but plenty of experts say a major correction likely lies ahead. James Kostohryz of JK Market Insights offers MarketWatch several reasons why stocks could drop 10 percent to 20 percent by July.
Kostohryz, stocks, Fed, dollar
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2015-40-25
Wednesday, 25 February 2015 06:40 AM
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