Survey: Stock market correction is overdue and likely imminent, say 70% of top analysts

A sizable majority of experts in a recent Bankrate survey say the stock market is overdue for a correction — down at least 10 percent from recent highs — and investors can expect a correction within the next six months. Bankrate’s Fourth-Quarter Market Mavens survey shows that 70 percent of analysts think a correction is imminent, and it also shows why these experts think so.

Bankrate’s research revealed a broad belief that the S&P 500 index would fall in the near term:

• An overwhelming 70 percent of respondents said the market is overdue for a correction, now or in the next six months.
• 10 percent said a correction was not imminent but expected it to happen within the next year.
• 20 percent of the respondents said they did not know or gave a different answer.

The results may be a little shocking, as every analyst also expected the S&P 500 to rise by the end of 2022, according to the survey. In fact, these market analysts expect the index to grow by nearly 8 percent by the end of next year, just below its historic level.

Forecasts and analysis:

This article is one in a series that discusses the results of Bankrate’s Market Mavens survey for the fourth quarter:

Why do experts expect the stock market to correct?

The reasons why these experts expect the market to retreat are varied, but some themes emerged from the responses. These include rising interest rates and the overvaluation of stocks. The S&P 500 has had an almost uninterrupted run since bottoming out in March 2020.

Reasons to expect a decline now or within six months

Most respondents said the market was overdue for a correction and that we could see one in the next six months. Some analysts have pointed to dynamism around the new year, and market observers are also closely monitoring the Federal Reserve’s interest rate movements.

“Investors are sitting on large capital gains and are delaying sales until the new year,” said Michael K. Farr, CEO of Farr, Miller & Washington. “This postponed sale combined with a Fed determined to cut accommodation and a historically weak quarter for markets, and the elements for a long-awaited pullback are in place.”

Others point to a series of issues plaguing markets over the next two quarters.

“Expect the first six months of next year to be volatile as global markets continue to work on supply chain adjustments,” said Dec Mullarkey, CEO of SLC Management. “Therefore, concerns about growth and inflation are likely to flare up from time to time.”

Mullarkey also points to rising interest rates and timid investors who may be looking to central banks like the Fed.

“Central banks will also tighten, which could have the potential to cause disconnections and periodic rises in risk aversion,” he says. “Overall, though, we expect the S&P 500 to end the year strongly.”

Count Joseph Kalish, chief global macro strategist, Ned Davis Research, is among those pointing to rising interest rates as a cause for concern.

“There could be a correction as financial conditions tighten for expected rate hikes,” he says, noting that a dip could occur mid-year.

Reasons to expect a correction within the next year

Only one of the survey respondents thought a correction was not imminent, but would happen in the next year or so.

Sam Stovall, chief investment strategist, CFRA Research, points to overvaluation as a key reason for its call, citing an elevated price-to-earnings (P/E) ratio, a key valuation metric.

“The P/E of the S&P 500 is currently 20 percent above the average in previous periods when 10-year yields have been between 1 and 2 percent,” Stovall said. “Inflated valuations don’t make markets correct, but make them more vulnerable to market shocks.”

Other experts are unsure

A few other experts say they are calling no time for a correction, but at least one also cites interest rates as the reason why the market could retreat.

“The timing is unknown,” said Patrick J. O’Hare, principal market analyst at Briefing.com, “but trends in interest rates play a role in timing.”

Meanwhile, Kim Forrest, chief investment officer/founder, Bokeh Capital Partners, remains more indifferent about the timing and cause of any future corrections.

She says that “10 percent corrections aren’t that uncommon, but predicting the kind of motivators they’re causing is difficult.”

What to do if you think a sharp drop in stocks is imminent?

As Forrest points out, market corrections are not that rare, although investors spend a lot of time worrying about them. The signs of an impending correction, such as overvaluation, can persist for a long time without the market falling. That’s why it’s important to focus on the long term, even if you’re positioning your portfolio to take advantage of an eventual dip.

“I always manage money and expect a 10 to 15 percent drop tomorrow, while simultaneously managing money to meet clients’ long-term financial needs five, 10, 20 years from today,” said Clark A. Kendall , president and CEO, Kendall Capital Management.

Because a correction can happen at any time, it’s important to stick to tried-and-true investment principles, including the following:

• Invest in fundamentally strong companies with growing cash flow.
• Use the dollar cost average to reduce the risk of buying too much at once.
• Diversification reduces the risk of a single investment hurting you too much.
• Minimize over-indebted companies and margin lending.
• Keep some money in your portfolio to take advantage of future opportunities.

Finally, if you’re following good investment practices, it’s important not to get caught up in the day-to-day swings, as you could become too emotionally invested and make a bad decision in the heat of the moment. Stick to the long-term game plan and you’ll be better off.

“In general, investors pay too much attention to the short[-term] completely missing market movements and long-term opportunities,” says Kendall.

Methodology

Bankrate’s fourth quarter 2021 survey of stock market professionals was conducted Dec. 1-9 via an online poll. Survey requests were emailed to potential respondents across the country and responses were submitted voluntarily through a website. Responding were: Clark A. Kendall, President and CEO, Kendall Capital Management; Dec Mullarkey, General Manager, SLC Management; Patrick J. O’Hare, chief market analyst at Briefing.com; Joseph Kalish, chief global macro strategist, Ned Davis Research; Sam Stovall, chief investment strategist, CFRA Research; Marilyn Cohen, CEO, Envision Capital Management; Chuck Carlson, CFA, CEO, Horizon Investment Services; Kim Forrest, Chief Investment Officer/Founder, Bokeh Capital Partners; Michael K. Farr, CEO, Farr, Miller & Washington; Kenneth Chavis IV, CFP, Senior Investment Manager, LourdMurray.

Editorial Disclaimer: All investors are advised to do their own independent research into investment strategies before making any investment decision. In addition, investors are advised that past performance of investment products is no guarantee of future price increases.