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Stock market correction is likely in 12 to 36 months: CFA Institute

·Anchor, Editor-at-Large
·3 min read
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The fundamental analysis fans who hold the distinguished CFA (chartered financial analyst) title believe the stock market has gotten too hot for its britches. 

A new survey out Tuesday from the CFA Institute found that 45% of respondents think stocks in their respective markets have recovered too quickly. The cohort expects a correction in stock prices within the next one to three years, though the precise degree of the said pullback wasn't shared. 

The CFA Institute's survey reflected feedback from 6,400 of its members globally. 

“It is interesting to see the survey results telling us that respondents believe that equities have recovered too quickly, as it could show that CFA Institute members believe there is a disconnect between economic growth fundamentals and capital markets caused in part by monetary stimulus, which could be corrected in a not-too-distant future of less than three years,” said CFA Institute managing director of research, advocacy and standards Paul Andrews in a statement. “To me, it also indicates to authorities that monetary stimulus is not a simple or linear lever to pull given the complexity of the economic and financial ecosystem; there will be unintended consequences to consider in the future.”

A muted stance on stocks by CFA charter-holders — no great shock given the designation's focus on adhering to tried and true valuation methods — is seen around the globe.

Respondents in North America are more worried about a correction than Europeans (50% vs. 40%), which the survey says could be explained by the pace of recoveries in each respective market since the height of the COVID-19 pandemic fear in March 2020. 

Meanwhile, many of those surveyed believe developed market equities are more overvalued than those in emerging markets. The grounds for that view stems from differing levels of government relief programs. 

CFA charterholders may not be too far off base in their concerns about current market valuations as investors clearly voiced their worries on the topic in May. Some would argue the month saw a mini correction in pockets of the S&P 500 and an all-out rout in hot names elsewhere.

For instance, NYSE senior market strategist Michael Reinking notes the consumer discretionary sector fell 3.7% in May and was the worst performing space in May. Most of the losses could be attributed to plunges in high beta names like Tesla and Amazon, which declined 11% and 7%, respectively. The NYSE FANG+ Index ended May down 2.3%, but at one point in the month was down 10%. Cryptocurrency prices crashed across the board, with bitcoin alone crashing nearly 40%

"This past month [May] the market has endured an inflation scare, an acceleration of the tech/growth selloff, a leverage induced unwind in the crypto markets and the Federal Reserve starting to talk about talking about tapering. What this has done is clear out some extreme positioning/sentiment which sets up for the pause that refreshes. That pause in the S&P 500 has been ongoing for two months now with the index back at the high end of the 4,050 - 4,225 range," points out Reinking.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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