The stock market has pretty much gone up in a straight line in 2013. In fact, the Standard & Poor's 500 hasn't suffered a 10% price correction since late 2011. Some key ingredients that normally spark corrections are showing up in the market: rising optimism; a coming shift to tighter monetary policy; richer valuations; an aging bull; and a big investor appetite for IPOs. Is the market due for a drop that could bring fear back to Wall Street?
USA TODAY: Is the stock market vulnerable to a major decline of 10% or more in 2014? What are some potential catalysts? How severe would it be?
Savita Subramanian, head of U.S. equity and quantitative strategy, BofA Merrill Lynch: Five percent corrections happen about three times a year, on average, so I don't think the idea of a correction is outlandish. But I think that whatever corrections we see could be short and shallow. That's because there is still a lot of money sitting on the sidelines. We look at cash positions of stock mutual funds, and they are fairly elevated, relative to history. There is still a fair amount of capital waiting to invest in new good ideas. The interest in new equity issuance, such as IPOs, has been staggering, suggesting that there is capital ready to be deployed.
Finally, the No. 1 phrase that I hear from clients is, 'Yes, we like equities, we don't see any other compelling asset classes, but we're just waiting for a better buying opportunity.' That suggests to me that any sort of a correction will be met by capital being deployed.
USA TODAY: Still, there are a handful of respected Wall Street shops that say stocks could suffer a meaningful pullback. Are they right?
Kevin Landis, CEO and portfolio manager, Firsthand Technology Value Fund:Our views are always informed by our past. As a tech investor who lived through 2000, the lesson is: Don't trust the reassurance. You are always vulnerable to a correction, and the surprise usually does not come from where you think it is going to. Yes, it can happen at any time.
The other lesson you learn is, a large portion of the people who say they are waiting for a better buying opportunity turn into huge chickens the minute they get it. That tends to make the correction a little more dramatic than you thought it would be.
USA TODAY: So If corrections are a part of market life, is there a way for investors to play it?
Larry Robbins, CEO and portfolio manager, Glenview Capital Management: I do not think that anybody sitting here is saying that there is not a chance of a correction. But from what level? We are around 1,800 on the S&P 500. I love the people who like to prognosticate that there is going to be a drawdown, but one can wait a long time waiting for that. Look, they'll say, the market went down 10% or 16%. But if it goes down from 2,200 (or 22% above 1,800) to 2,000, that doesn't help somebody sitting here today.
Geopolitics is always a risk. And We do have midterm elections coming up in late 2014. It is becoming an American pastime to try to make it look like the world is coming to an end if you don't vote for one party or another. later on this year. To the extent that a geopolitical issue happened in the Middle East or other places, or (political risk) tied to the midterm elections returned, those are the types of things that maybe could sow the seeds for a correction.
But again, for the average investor who has to make decisions about how to save and invest for your child's college education or for your retirement, one can sit on the sidelines forever waiting for those things. My take-away is that the overall backdrop for stocks remains at least normal, if not reasonably constructive. And we certainly don't see any signals that say the probability of a correction, crash or bear market has a higher-than-average probability heading into 2014.
USA TODAY: If we do get a pullback, would it prove to be an opportunity for folks to get in at lower prices?
Nick Thakore, portfolio manager, Putnam Voyager Fund, Putnam Investments:It always depends on the facts, but yes. I agree with Larry's point: Don't wait for a correction (to put money to work). If you think the big picture is good, it is probably the right answer.You could have missed the 660 to 1,800 move on the S&P 500. To be very clear, I am not making this call, but of course, there is a chance of a big sell-off. There always is.
But what will surprise most people is if we get a repeat of 2013 in 2014. I am not making that call, either. But it is in the realm of possible outcomes. I wouldn't be surprised if it happened again. It would probably take lot of things: an earnings re-acceleration; a market that manages rising rates; and if we get the Great Rotation that everybody has been waiting for.
USA TODAY: There's a new theory on Wall Street that the only thing to fear is that nobody is fearful. Are investors getting too optimistic, and is that a sign of a coming drop?
Russ Koesterich, global chief investment strategist, BlackRock: I think there is probably enough optimism that you can have a correction, particularly if you have an event that is not discounted in the market. But, I don't think we are seeing the type of euphoria, either in valuations or in sentiment, that we have seen in other major market peaks.
