Stock investors are feeling confused of late–and you can't really blame them. The headline stock market indexes (Dow, S&P 500) edged up in mid-May to all-time highs. Yet many of last year's favorites continue to stumble: biotechs, social media, small caps. Perma-bears, sensing an opportunity to salvage their battered reputations, are snarling into TV cameras with spine-chilling predictions of an imminent crash.
Is it Apocalypse Now? I don't think so. Yet it's abundantly clear that some areas of the equity market became way too richly priced at the end of 2013 and into the first quarter of this year. Those stocks–and even whole industry groups–are taking a well-deserved bath, which may continue through most of the summer.
Furthermore, I agree with the bears that the ongoing "correction" in the glamour names will likely dent a broader list of stocks before all is said and done. When Mr. Market gets into a mean streak, he often lashes out indiscriminately, even if many of his targets only suffer a glancing blow.
But a steep marketwide drop (20% or more in the headline indexes) seems improbable. Three reasons why:
Frankly, the intense speculation on Wall Street last year worried me. Steady dividend payers lagged, while the LinkedIns and Twitters soared. Ah, but now the shoe is on the other foot! Our REITs, utilities and preferred stocks have climbed smartly this year, while the speculative dandruff has fallen to the floor. Could it be that a good part of the long-awaited "correction" has already taken place, right under our noses?
I'm not ruling out the possibility of a deeper pullback for the marquee indexes than we've seen so far. In fact, I expect it. However, I now believe the summer retracement may not take the S&P 500 more than 6%–9% below its May peak.
Richard E. Band is the newsletter world's #1 authority on investing for low-risk growth. His flagship Total Return Portfolio has quintupled in value since its inception in 1990, while taking far less risk than the popular stock market index funds. More »
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