It’s been nearly four years since U.S. stock markets (^DJI, ^GSPC) last experienced a true correction, and some investors are getting nervous and biding their time.
“I don’t think we need a correction,” says David Joy, chief market strategist at Ameriprise. “Quite frankly I think the market is fairly valued right now.” Markets have come down a bit bringing some of the froth out of valuations, he says. Joy believes that investors are currently waiting—they want to see when the Fed will raise rates, and whether the U.S. economy can accelerate fast enough to boost earnings. He expects that there will be mini corrections in the market, but isn’t expecting a big pullback anytime soon. A correction is defined as a pullback of 10% or greater.
China's Shanghai Composite Index (SSE) plunged 30% from its June 12th peak. To combat this, the Chinese government is buying stock and has banned new IPOs, but so far that hasn't quelled investors' fears.
In the U.S., bears worry that Chinese contagion will reach U.S. markets. Joy believes there is reason to be concerned to a certain extent. “China is the world’s second largest economy,” he says. “If the Chinese economy is slowing down that will impact us.”
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One of the hallmarks of Q2 earnings, says Joy, is that companies in the energy sector that derive more than half of their revenues domestically have seen earnings grow by 8% on average. Companies that derive more than half of their revenue from outside of the U.S. have had flat and slightly negative numbers. “So what the market is rewarding here is mostly domestic sectors,” he explains. “Commodities, I’m afraid, are going to remain under pressure as long as China is a question mark.”
Joy recommends investing in the consumer discretionary, financial and healthcare sectors, which are all domestic-facing.
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