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U.S. Markets Due for a 10% Correction, Says Main Street Research CIO
Overbought Territory and Complacency Raise Concerns
James Demmert, chief investment officer of Main Street Research, believes that U.S. markets are overdue for a 10% correction. He points out that stocks are largely in overbought territory and investors are very complacent. This level of complacency has preceded the past three major declines within this 18-month bear market. Demmert suggests that if the Fed raises rates at its July meeting with a hawkish tone, this could be the catalyst for the correction.
Vulnerability Due to Earnings Season and Lower Guidance
According to Demmert, earnings season is getting underway and many reports are expected to include lower guidance. This could make the market vulnerable from its current levels. He emphasizes that market sentiment is extremely confident, particularly after the passing of the debt ceiling. The volatility index (VIX) is at one of its lowest levels ever, and historically, when investors are this complacent, volatility tends to surge in the coming weeks.
Evidence of a New Bull Market Pending
While some view the S&P 500 as already in a new bull market, Demmert disagrees. He believes that the bear market is not yet over. He explains that the bear market will truly end when the S&P 500 reaches a new high. Its all-time closing high is 4,796.56, while it is currently trading around 4,510. Demmert highlights the narrowing leadership of the index, with only seven megatech stocks driving much of the gains this year. However, he suggests that a trigger for a new bull market could be money rotating out of these seven stocks and into the rest of the market, which has been largely ignored. He predicts that this rotation could happen in the second half of the year.
Investment Strategy for Near-Term Correction
In the event of a near-term market correction, Demmert advises investors to have some dry powder ready to go. He believes that now is a great time to have a mix of domestic and international stocks in a portfolio, as there are great values in overseas stocks, particularly in developed countries like Japan, France, and Germany. Demmert also suggests three stocks to buy: French luxury house LVMH, Japanese industrial conglomerate Mitsui (in which Warren Buffett owns a stake), and U.S. semiconductor firm Advanced Micro Devices, which he sees as a beneficiary of the AI secular tech boom.
Potential Impact on New Businesses
The anticipation of a 10% market correction, as highlighted by Main Street Research CIO James Demmert, could have potential implications for new businesses entering the market. As the stock market experiences a period of vulnerability and uncertainty, it is necessary for entrepreneurs and startups to carefully consider and adapt their strategies.
1. Heightened Caution and Financial Planning
With the potential for a market correction on the horizon, new businesses should exercise caution and implement effective financial planning. This includes having a solid budget and financial reserves to navigate potential downturns. Planning for contingencies and ensuring sufficient liquidity are key factors that can help businesses weather economic uncertainties.
2. Opportunities for Investment
Despite the potential market correction, there may be opportunities for new businesses seeking investment. As investors reevaluate their portfolios and look for alternatives outside of overbought stocks, they may turn to promising startups with innovative ideas. Entrepreneurs who can present a compelling business model and demonstrate growth potential may attract the attention of investors seeking to diversify their holdings.
3. Capitalizing on Market Shifts
The shifting market landscape resulting from a correction provides a chance for new businesses to position themselves strategically. By analyzing the market trends and consumer behaviors, entrepreneurs can identify emerging opportunities and adapt their offerings to meet changing demands. Being agile and responsive to market shifts can enable new businesses to gain a competitive edge and capture market share during volatile times.
In conclusion, new businesses must exercise caution and adapt their strategies in response to the potential market correction. By practicing financial prudence, positioning themselves as attractive investment opportunities, and capitalizing on market shifts, entrepreneurs and startups can navigate these uncertain times and position themselves for long-term success.
Article First Published at: https://www.cnbc.com/2023/07/18/investment-manager-markets-are-overdue-a-correction-buy-these-stocks.html