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

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

Bankrate’s survey showed a broad-based 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, any day now or within the next six months.
• 10 percent said that a correction wasn’t imminent but expected it to happen within the next year.
• 20 percent of respondents said they didn’t know or provided another response.

The results may be a bit shocking, since every single analyst also expected the S&P 500 to rise by the end of 2022, according to the survey. Actually, these market analysts expect the index to grow nearly 8 percent by the end of next year, just a bit below historical levels.

Forecasts and analysis:

This article is one in a series discussing the results of Bankrate’s Market Mavens fourth-quarter survey:

• Top market strategists see stocks rising nearly 8 percent in 2022
• Experts forecast strong rise in Treasury yields over next year
• Stock market correction is overdue and likely imminent, say 70 percent of top analysts
• 6 things individual investors should avoid in 2022, according to top market experts

Why are experts expecting the stock market to correct?

The reasons these experts are expecting the market to pull back 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 what seems like an almost uninterrupted run since the bottom in March 2020.

Reasons to expect a drop now or within six months

Most respondents said the market was overdue for a correction and we could see one within the next six months. Some analysts pointed to dynamics around the new year, and market watchers are also eyeing the Federal Reserve’s moves on interest rates very closely.

“Investors are sitting on large capital gains and deferring sales until the new year,” says Michael K. Farr, CEO, Farr, Miller & Washington. “This deferred selling combined with a Fed that’s determined to remove accommodation and an historically weak quarter for markets, and the elements for a long-awaited pull-back are present.”

Others point to a range of issues that could plague markets in the next two quarters.

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

Mullarkey also points to rising interest rates and skittish investors who may be looking to second-guess central banks such as the Fed.

“Central banks will also be tightening, which has the potential to cause disconnects and periodic surges in risk aversion,” he says. “Overall, though, expect the S&P 500 to finish the year strong.”

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

“A correction could happen as financial conditions tighten on expected rate hikes,” he says, noting that a dip could happen around mid-year.

Reasons to expect a correction within the next year

Just one of the survey’s respondents figured that a correction was not imminent but would occur in the next year or so.

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

“The S&P 500’s P/E is currently 20 percent above the average during prior periods in which the 10-year yield was between 1 percent and 2 percent,” Stovall says. “Inflated valuations don’t cause markets to correct but make them more vulnerable to market shocks.”

Other experts are uncertain

A couple other experts say they’re not calling a time for a correction, but at least one also cites interest rates as a reason for why the market may pull back.

“The timing is unknowable,” says Patrick J. O’Hare, Briefing.com chief market analyst, “but interest rate trends are apt to play a part in the timing.”

Meanwhile, Kim Forrest, chief investment officer/founder, Bokeh Capital Partners, remains more agnostic on the timing and cause of any future correction.

She says that “10 percent corrections are not that unusual but forecasting the sort of drivers that cause them is difficult.”

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

As Forrest points out, market corrections aren’t really that rare of a beast, though investors spend a lot of time worrying about them. The signs of a coming correction, such as overvaluation, can continue for long periods 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 any dip.

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

Because a correction could occur at any time, it’s important to stick to time-tested investing principles, including the following:

• Invest in fundamentally strong companies with growing cash flow.
• Use dollar-cost averaging to reduce the risk of buying too much at one time.
• Diversification reduces the risk of any single investment hurting you too much.
• Keep overly indebted companies and margin loans to a minimum.
• Keep some cash in your portfolio to take advantage of future opportunities.

Finally, if you’re following good investing practices, it’s important not to get wrapped up in the day-to-day fluctuations, because you could become too emotionally invested and end up making 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] market moves and completely miss the long-term opportunities,” Kendall says.

Methodology

Bankrate’s fourth-quarter 2021 survey of stock market professionals was conducted from Dec. 1-9 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Clark A. Kendall, president and CEO, Kendall Capital Management; Dec Mullarkey, managing director, SLC Management; Patrick J. O’Hare, Briefing.com chief market analyst; 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 wealth manager, LourdMurray.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.