Expect a Market Correction, Sam Stovall Warns

Are we overdue for a market correction? Sam Stovall thinks so. After the past few days’ slide (the S&P 500 did blip up Tuesday by 0.13%), CFRA Research’s chief investment strategist sees several signs that a 10% or so downdraft could be coming in the near future.

These indications, ranging from fundamental measures such as high margin debt to technical metrics like 200-day moving averages, prompted Stovall to write in his recent research report: “It’s not a question of ‘if’ but ‘when.’”

Corrections (downturns between 10% and 20%), of course, are uncomfortable episodes, and they’ve cropped up sporadically during the long bull market.

We had a near-miss in September, amid worries about Congress passing new economic aid and the rise of political opposition to Big Tech’s influence: The S&P 500 fell 9.6%. And we also endured a monster crash almost a year ago, when the index swooned 33.9%. That fright fest since has reversed itself, and then some.

For more stories like this, sign up for the CIO Alert newsletter. 

Let’s be clear: Stovall is no Cassandra. In his note, he argued that downdrafts are inevitable and even healthy. In a long-term optimistic “Hakuna Matata” refrain that would do The Lion King proud, he counseled that “every pullback, correction, and bear market has eventually recovered.”

But face the facts. When they happen, market falls are plain damn painful. What Stovall sees as portents of a possible correction are:

The S&P 500’s market value sits at an all-time high of 140% of US gross domestic product (GDP). That’s compared with a six-decade average of 62%.
Margin debt also is at an all-time high, whether measured against the S&P 500 or GDP. When investors get highly levered, that’s usually a time to worry because they get a double-whammy when the market tanks.
Every major S&P 500 sector, other than health care, is trading at double-digit premium to its 20-year average price/earnings (P/E) multiple. For the S&P 500 itself, the premium is 37%, and the sectors span a wide distance between 12% and 93%.
The small cap benchmark Russell 2000, versus its 200-day moving average, is at a record of more than 40%. That testifies to small-caps’ remarkable resurgence.

Over the past quarter-century, the stock market has had 11 big declines, Stovall reported—with eight corrections and three bear markets. During those spells, the three highest-performing major sectors, during the six months prior to the dips, lost on average 31.7% and the best sub-industries dropped 43.9%.

The sub-sectors doing the best recently: agricultural and farm machinery, apparel accessories and luxury goods, automobile parts and equipment, Stovall wrote.

Auto makers, broadcasting, copper, investment banking and brokerage, real estate services, regional banks, and semiconductor equipment have also done well.

When the selloff is over, the three worst-suffering sectors climbed an average 30.6% over the next six months, while the S&P 500 increased just 25.2%, according to Stovall. The 10 worst performing sub-sectors went up an average 42.7% in the same period.

Will the Wheels Come Off the Market in 5 Years?

Vaccines and Pent-Up Demand Will Jazz Stocks, Says Paul Tudor Jones

Tags: Bear Market, CFRA, Health Care, margin debt, market correction, P/E, P/Emarket correction, Russell 2000, S&P 500, Sam Stovall

A task force headed by Wisconsin’s state treasurer has recommended that Wisconsin establish a state-run program that provides a retirement benefit plan for employers that don’t offer one.

The task force, which was created by Wisconsin Gov. Tony Evers in 2019, issued a report outlining the causes of the state’s “retirement security crisis” and provided several recommendations it said would strengthen the financial security of Wisconsin’s retirees.

“Wisconsin is in trouble when it comes to retirement security,” the task force’s report began ominously. “Even before the COVID-19 pandemic, our retirement system was not working for a significant number of Wisconsin workers.”

The report cited a University of Wisconsin study that found that more than 400,000 seniors in the state will be in poverty by 2030, which it said will require Wisconsin to spend an additional $3.5 billion on public assistance programs.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

“This trajectory provides a warning that today’s retirement system is not working for many Wisconsinites, and state action is essential,” the report said.

The task force said a major cause of the crisis is that Wisconsin’s aging population is above the national average. According to the report, there will be more than half a million additional seniors who are 65 or older living in Wisconsin between 2015 and 2030—an increase of nearly 60%. It also said that approximately 20% of households in the state with respondents 55 to 65 years old have a negative net worth of $20,660 with no retirement savings, and that 30% of senior households in the state are 200% below the federal poverty line.

“While Wisconsinites are living longer and life expectancies continue to grow, seniors will need additional savings, beyond Social Security, to cover costs,” the report said.

Among the task force’s recommendations is the creation of WisconsinSaves, a state-facilitated, privately managed automatic individual retirement account (IRA) program for workers who don’t have access to an employer-sponsored retirement plan. Eligible employers would need to register with the auto-IRA program, provide a basic employee roster of information to the program recordkeeper, and remit the employee contributions for each pay cycle. There would be no employer fees, contributions, or fiduciary responsibility.

In addition to WisconsinSaves, the task force provided four other recommendations it said would strengthen financial security and address the state’s retirement savings crisis:

Create incentives for auto-enrollment best practices to increase participation in workplace retirement plans by encouraging employers to require employees to opt out of the plans if they don’t want to participate, rather than requiring workers to proactively sign up for a plan.

Develop an emergency savings tool to ensure employees have a rainy-day fund.

Launch a “401(K)ids” program that would create an investment account for every child born in Wisconsin.

Construct an ecommerce web platform to serve as a centralized place for Wisconsinites to identify options available to save for retirement, while also learning more about good financial habits.

“A large number of our state’s residents are ill-prepared for retirement or an unexpected financial emergency,” according to the report. “This fact, coupled with a rapidly aging population, suggests that state program expenditures will rise significantly if nothing is done, and the impact of the COVID-19 pandemic has likely made the problem worse.”