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Correction? What correction?

Are global markers on the verge of a long overdue correction? Maybe. Or maybe not...

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Jan 7, 2014

by Max Fawcett

After a year in which major equity markets in the U.S. posted gains of nearly – or in excess of, depending on the particular index – 30 per cent, investors are wondering what’s in store for 2014. Another year of boffo returns? A correction? Reversion to the mean?

Joshua Brown, a New York-based financial advisor at Ritholtz Wealth Management who blogs at The Reformed Broker, thinks the correction that everyone seems to be waiting for could come in the form of time, not price. He thinks, much as happened in 1994, the markets will take some time to factor in the true impact of the ongoing economic recovery, and that they will grind sideways for a while. “I wouldn’t fall out of my chair if we went through something similar now as rates normalize and stocks digest huge gains,” he wrote recently. “Consolidation is terrific and I certainly would much prefer to correct through time rather than through price any day of the week.”

That’s why, he said, sitting on the sidelines in cash waiting for a correction might not be the best strategy. And just because the market’s in the midst of a strongly bullish trend doesn’t mean it’s obligated to reverse course or even take a meaningful pause. “It is entirely possible that we’re on the precipice of the next great age of global growth fueled by a rejuvenated sense of ambition and a rebound in large-scale investment. There’s certainly enough liquidity to fuel it, but end-demand is the only key that can unlock the door. It is too early to say whether or not this kind of pent-up end-demand, on a global basis, will show up in time.”

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Business Insider’s Henry Blodget says a correction may be imminent, and while he’s not reducing his exposure to equities he gets more nervous with every leg higher they take. “Valuation is not helpful as a market-timing tool, so today’s prices do not mean that stocks will crash anytime soon (or ever). Instead, stocks could deliver lousy returns just by moving sideways for a decade,” he wrote recently. “But anyone who has followed the stock market for a while knows that stock prices do not generally correct valuation extremes by moving sideways. Rather, stocks generally correct sharply. That’s why I’ve said I think the odds of a market crash are increasing. And I still think that — more so with every new move up.”

But if the recovery does truly take root in the U.S., China finds a way to avoid popping the credit bubble that it’s been blowing for the last few years and Europe’s leaders display even a modicum of managerial competence when it comes to economic policy? Well, Alberta – and Alberta-based companies – may be poised to benefit along with other commodity-oriented economies. In Barron’s, Wells Capital Strategist James Paulsen outlines why he likes commodities more than equities or bonds in 2014. “First, value has been restored among most commodity prices as they have underperformed during the last couple years and are no longer over-extended…. Second, the biggest challenge facing the commodity markets has been spotty and weak global economic growth. In the last couple years, many economies were either still in contraction (Europe and Japan), experiencing a major recovery slowdown (emerging economies), or were growing but only very sluggishly (U.S.). Global economic activity has synchronized and strengthened nearly everywhere as we enter 2014 which should produce a much better year for commodity investors.”

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