Throughout the month of January, as stocks have marched higher with no significant downward moves, the calls for a correction have been getting louder.
We've finally arrived at the point where Wall Street strategists are declaring an expected pullback in the stock market this month as a "consensus" view.
JPMorgan's top equity strategist, Tom Lee, is considering the same thing – but he takes the thought experiment one step further today.
What if we don't get a correction at all?
In a note to clients, Lee writes:
In our view, we still see [the first half of 2013] as tricky, but it’s too early to call for retracement given where hedge fund beta and high yield spreads sit. Our base case has been for the S&P 500 to start the year strong and rally to around 1500 before seeing a retracement towards 1350-1400. Investors have asked us recently whether the resilience in markets has altered our 1H13 views, especially as the S&P 500 is above the 1500 level we initially targeted short-term.
The key question is what is likely to be the “downside” catalyst that significantly weakens markets to trigger a retracement. In our view, what typically happens prior to a 5%-10% retracement is that risk/reward for markets becomes balanced or even unfavorable as the market becomes positioned for only good news— that is, vulnerability emerges when investors are already overweight stocks, valuations are more demanding and credit backdrop is less supportive. We have not seen such signs associated with near-term peaks, so we remain constructive for now. In any case, we recommend investors buy dips and overweight stocks throughout 2013.
What could go wrong? Market does not correct in [the first half of 2013]. We see the biggest challenge to our view as the possibility that equity markets are not negatively affected by bad news and continue to strengthen through 1H. And this could be a result of a change in the market’s character. If investor confidence strengthens, there may be less volatility.
Needless to say, this market has a lot of folks scratching their heads right now.
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