Two strategists weigh odds of correction
The S&P 500 and Nasdaq held near records to end the week despite a disappointing jobs report.
Both those indices reached all-time highs on Thursday and hovered near those on Friday. Markets have extended a relentless rally that has stretched through the summer despite a resurgence in Covid cases across the U.S.
But, Miller Tabak chief market strategist Matt Maley has a warning.
“There’s a huge amount of froth in the marketplace right now much like we’ve seen in other important tops of the market that only became obvious in hindsight,” Maley told CNBC’s “Trading Nation” on Thursday.
Maley sees warning signs in today’s market that look similar to red flags during the 1999-2000 and 2007-2008 peaks. During the dotcom bubble, for example, he says stocks shot sky-high no matter the fundamentals much like AMC and GameStop have this year.
“Now we have a very similar situation,” said Maley. “You have the meme stocks which are flying, … they’re not going to change the world and these stocks are going up 2,000% in just a few days, you have these SPACs that are going crazy here. We have a stock market that’s very, very expensive, and a market that is overbought.”
While he does not foresee a crisis as significant as in the 2000s, Maley says it does serve investors to be cautious and adjust strategy accordingly.
“It doesn’t mean sell everything, go to 50% cash, or even 20% cash, but if you raise a little bit of cash, you’ll be able to buy stock if it corrects, but more importantly, you won’t be selling when the market is down 15% or 20%, when everybody else is selling at the exact wrong time, you’ll be the one keeping your head, holding on to your winnings and be able to take advantage of the market when it goes back up,” said Maley.
Investors should be looking out for the catalyst that could prompt the downturn, says Gina Sanchez, chief market strategist at Lido Advisors and CEO of Chantico Global. She sees two potential triggers.
“The first catalyst I see is just the fact that we have priced in very strong expectations. We’re going to hit huge GDP growth this year. Next year, we’re going to have lower GDP growth. Will it still be strong? Yes, but it will be less than now,” Sanchez said during the same interview.
Like GDP estimates, Sanchez says earnings growth will also likely weaken as companies face stronger comparable past quarters. While still strong, she says there is room for disappointment.
“The second and more important catalyst I’m looking for is when the liquidity starts to get dialed in and stepped out of the market. When that happens, I think that’s when you could have a real potential correction,” said Sanchez.
The Federal Reserve, one of the biggest sources of excess liquidity in the market, has signaled it could begin to taper its bond-buying program by year’s end. The central bank will next meet on Sept. 21 and 22.