Moneta Group’s Chief Investment Officer, Bill Hornbarger, was quoted in USA Today on October 2, 2014 in an article titled, “5 reasons why a 10% correction could be bullish.” Visit the following link to read the article; or read the text below.
5 reasons why a 10% correction could be bullish
By: Adam Shell October 2, 2014 3:00 pm
If the S&P 500 stock index keeps tumbling and goes on to post its first 10% price correction in three years, many Wall Street pros say it might actually be a good thing for the stock market.
“You never want to hope for a correction, but we are overdue,” says Bill Hornbarger, chief investment strategist at Moneta Group.
The last time the benchmark Standard & Poor’s 500 suffered an “official” correction, or a drop of 10% or more from a prior closing high, was nearly three years, or 36 months, ago — when a 19.4% decline ended on Oct. 3, 2011. Corrections typically occur every 18 to 20 months.
And one of the big reasons Wall Street bears cite when calling for a significant stock market selloff is the fact that we haven’t had a correction in such a long, long time. The other reasons are now greatly publicized: the pro-democracy protests in Hong Kong and other geopolitical risks, the coming interest rate hikes from the Federal Reserve and the emerging Ebola crisis.
Before we outline the reasons why a double-digit percentage downdraft might be bullish in the long run, let’s first put the current decline into perspective. The S&P 500 headed into Thursday’s trading session just 3.2% from its Sept. 18 record closing high of 2011.36. And today its trading 0.25 higher at 1950.
Here’s five reasons why a 10% price correction might be a good thing:
1. Flushes out the froth. “I think (it) would wash out some of the excess speculation and be healthy long-term,” says Hornbarger.
2. Gives investors on sidelines an entry point. “A ‘breather’ would help reset expectations and affords an opportunity for those who have been waiting to enter the market,” says Brian Belski, chief investment strategist at BMO Capital Markets.
There are countless investors that have missed a bulk of the rally that began more than five years ago and are waiting for stock prices to fall far enough before jumping back in.
3. Reset P-E multiples. One risk worrying investors is that the stock market is now trading at a higher price-to-earnings ratio than its long-term average. The S&P 500 kicked the week off selling at 15.6 times its forward four-quarter earnings, which is nearly a full point higher than its long-term average of 14.8, according to Thomson Reuters data.
“P-E multiples have expanded in a meaningful way over the last few years, so seeing some multiple compression could actually be a positive,” says Ann Miletti, managing director and lead portfolio manager for Wells Fargo Core Equity Team. “That type of correction would present more buying opportunities for us and other investors.”
4. Refresh, reenergize the bull. “Corrections are the pause that refreshes,” says Alan Skrainka, chief investment officer at Cornerstone Wealth Management. “This is the fifth-longest rally in the S&P 500 since 1928 without a 10% correction. Corrections wash out speculators and set the stage for the next advance.”
5. Correction fears dissipate. If the big fear is a market correction then it follows that that fear will fade once the correction occurs — and the market starts to bounce back after the 10% decline.
Bur there’s always a risk that a correction leads to a bigger drop, perhaps even a bear market, or plunge of 20% or more.
“A correction will trigger the debate of ‘bear or not a bear,'” says David Kotok, chairman & chief investment officer at Cumberland Advisors.
“I’m still holding a cash reserve,” he says.
For investors wondering how close the market is to a pullback (or drop of 5% to 9.99%), a correction (drop of 10% to 19.99%) or a bear market (a plunge of 20% or more) — see the chart below showing what price level each of the major U.S. stock indexes would need to sink to. (Note: the Russell 200 small-cap stock index hit correction territory on Wednesday.)
Source: USA TODAY research