Market Correction Likely Won’t Happen Because So Many Investors Are Expecting it, Says Goldman

Primarily because investors are so worried that one might be coming, there’s little chance of a stock market slide anytime soon essentially, according to a Goldman Sachs analysis.

Forming its base on, at least in some part, because it’s been so long since one has occurred, correction calls have abounded lately. It has been 19 months since the S&P saw the last full-blown correction, or drop of 10 percent and it has gone 14 months without a 5 percent drop.

The streaks will continue, believes Goldman analysts, who have been skittish about market values all year.

Any form of worry about the kind of euphoria that can kill a bull market have been negated because investors now are fearful about an impending fall in the market and this was cited as one of two key factors by the firm.

“Investors today are situated between skepticism and optimism,” David Kostin, Goldman’s chief U.S. equity strategist, said in a report for clients. “‘Tormented bulls’ best describes investor
mentality.”

His year-end S&P 500 target is 2,400, which would imply a 2.5 percent drop from Friday’s close and this makes Kostin’s position interesting. He doesn’t believe taken together, all the fears of investor will cause a major sell-off even though he cites that there are plenty of reasons for investors to fear that the market could slide. Political uncertainty, falling bond yields, an aging economic expansion, tightening fed policy, stretched valuations, and deceptively low volatility, are among the issues cited as reasons.

However, because of subdued market sentiment and strong consumer spending, which accounted for 69 percent of GDP as of the second quarter, he said the factors converging into a correction is a “low-probability event”.

A number of fronts are still remains the cause of concern for retail investors. Bullishness at just 29.3 percent, well below the long-term average of 38.5 percent s shown by the latest American Association of Individual Investors survey. Meanwhile, neutral sentiment is at 35 percent, 4 percentage points above the norm, bears, are at 35.7 percent, above the historical 30.5 average.

Though ETFs have more than offset that total with $291.7 billion in inflows, according to Bank of America Merrill Lynch, longer-term investors have pulled $81.1 billion out of stock-based mutual funds this year.

With retail sales rising a higher than expected 0.6 percent in July, the best move of 2017, the consumer also has shown resiliency.

Kostin is not alone in believing that the market is being supported by a solid base.

“While most are focused on the modest tightening moves being implemented by the Federal Reserve, investors should take note of the significant economic stimulus being provided by a much weaker U.S. dollar and much lower bond yields since year-end,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “Undoubtedly, the stock market will decline at some point, but most likely only when its underlying economic fundamentals falter.”

(Adapted from CNBC)

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