‘’The Stock Market is Melting up. Prepare for a Short-Term Correction.’’

This was the caption from an article published in this week’s edition of Barron’s Magazine. As of date of publication the S&P 500 was up 14 of the previous 15 weeks. This is the first time this has happened since 1972. What a great year so far.

What we should expect now is that we could very well experience a normal correction to the tune of about 10% which is a common occurrence and part of a normal course in the majority of equity bull markets. Inflation remains a bit stubborn which doesn’t help. Last month, the U.S. Core CPI, which doesn’t include food and energy rose 0.4% to 3.9%. The target is 2%. The good news here is that we are getting there. As a result, it is assumed this year we will see both the Federal Reserve in the U.S. and the Bank of Canada begin a series of interest rate cuts. This will again boost equity markets, albeit more likely in the U.S. than Canada.  As borrowing costs drop, businesses will resume spending to build their businesses which will increase revenues, earnings and profits and therefore stock prices.

BUT, back to the short-term market correction. If we had to guess, it could happen this summer, in the summer doldrums. The question you might ask is “Well, if that’s the case, shouldn’t we sell before that and then buy back on the market pullback?” The answer is a hard no. The reason for that is when it comes to market timing, you are either lucky or wrong. Being out of the market runs the very serious possibility of missing the bounce, and if you miss the best 5 days in any given year it has a significant negative impact on total return for the year.

Keep this in mind. The S&P 500 started the year at around $4,745. The consensus among some analysts at the time was that the year would finish at around 5,400. This prediction would result in a return of about 13.5%. Given what we think we know about a correction at some time this year, none of the analysts have changed their position.

https://advisor.visualcapitalist.com/cost-of-trying-to-time-the-market/

What does this mean for you?

To those who were feeling market stress in 2022 and early 2023, and you know who you are!  Now is the time to reduce risk in your portfolio to prepare for the next pullback.

If you would like to talk more about this and/or our views on interest rates, inflation and the bond and equity markets, we are here to help.