Wall Street Pros Explain Falling Stock Market
Strategists are still betting on a stock correction rather than crash. Either way, cheap valuations just got even cheaper
U.S. News asked some of Wall Street's top market strategists to explain the recent stock market plunge. Here's their take on whether the worse is over for investors or the pain is just beginning.
Mike Thompson, managing director of global research, Thomson Financial: "[These big negative moves] are completely driven by fears surrounding the mortgage credit situation. There's no doubt about it.... The market tends to pick a topic du jour. Right now fundamentals are being trumped by the fears and lack of full understanding of the amount of negative repercussion that this [credit] situation has created.
"On a valuation basis, U.S. equities are trading below the 20-year average.... Knee-jerk reactions tend to be way overdone. The market's history will tell you that. It's the first step, and then people focus and rationalize the situation in a much more disciplined manner.... If you're a pessimist, you'd say, 'The sky is falling,' on the other side, you'd say, 'Hey, we may have a smooth flight here.' It's hard to say, but we tend to be in the latter camp. We tend to see these types of market reactions as opportunities."
Jim Dunigan, chief investment officer, PNC Wealth Management: "A lot of what's affecting the equity markets is what's driven by the credit markets, which are less transparent.... We're finding the access to information is taking much longer, and that gap is creating anxiety.... The main questions investors have is, 'Is the system going to bend or is it going to break?' I think at the moment, we're at the bend category, and will be. We'll bend and stretch, but this will not fall in the context in of a financial crisis. We're in the camp that the slowdown in the housing market will impact economic growth, but it will not drag the U.S. economy into a recession.
"In times like these, there's opportunities.... High quality, large-cap stocks on sale would make some sense. Because of the robustness in global growth, good exposure to international markets would make some sense. I would be cautious on the financial sector for the time being. As this fleshes out, there will be some opportunities there, it just may be a little too soon. From a domestic standpoint, [I would focus on] large-cap, growth-oriented stocks. There are opportunities in industrials and in the energy sector."
James Stack, president of InvesTech Research in Whitefish, Mont.: "When the economy reaches a mature stage, economic imbalances develop.... Credit exposures have been created within the real-estate industry. The bottom line is, you have a flight to quality in both the stock and bond markets. Even last week, almost 1 out of every 4 stocks on the New York Stock Exchange was hitting new 12-month lows.... Investors were becoming nervous, and bear marketing leadership was increasing.
"Higher volatility is very common at critical market turning points. We saw it in 1987 leading up to the crash. We saw it in 1999, the last year of the high-tech bubble. That does not necessarily mean we're heading into a crash scenario, but it does suggest the market risk is higher than was commonly perceived.
"My advice would still be to sell down to a level of comfort.... This is still the second-longest period in Wall Street history without a 10 percent correction. It suggests we're overdue for the kind of correction that we've seen, and it could turn out to be healthy for the market. We have already sold down to our level of comfort. We've dropped our invested position down to less than 50 percent. The rest is in cash. Today we're sitting in our highest cash position since the last bear market ended in 2002."
Robert Doll, chief investment officer of global equities, BlackRock: "First, a point of context: The equity market, from its high, is down 5 or 6 percent, but it was up 25 percent roundly from July lows of last year to July highs of this year. So while it seems like the world is ending, we need to provide that perspective for people. It's down in the last few weeks, but up a bunch from a year ago.
"A lot of what is going on is de-leveraging and de-risking of portfolios. The genesis of that was the mortgage problems, in the sub-prime residential real-estate mortgage market.... The long and short of it is, throughout the system, risk has become a bad word after having been a good word for the prior period.... The question going forward is, 'How long does that last, and what impact does it have on the real economy?' While we don't know the answer to either question, our belief is that we are well into this, meaning there could be some more, but we believe there is more behind us than there is in front of us.
"There will be some impact on real economy, but we don't think that means the economic cycle is over.... Overall, the U.S. economy will continue to grow at a below-trend level. We're going to hobble along, below what we've been used to but still at an acceptable pace."