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The stock market may be poised for a big fall.
History is not on the market’s side.
U.S. stocks have gone over a year without a major drawdown, prompting some strategists to predict a swoon that could shave as much as 5% off of the S&P 500.
Ryan Detrick, senior market strategist at LPL Financial, is among those who are cautioning investors to tread carefully given the absence of a correction in the wake of the market’s dazzling performance since last summer.
“This is only the sixth time since 1950 that the S&P 500 has made it at least a year without so much as a 5% correction, and marks the longest streak since 1995,” said Detrick in a report Wednesday.
An equities-positive environment of robust earnings, low inflation, an accommodative Federal Reserve and reasonable valuations suggests the eight-year-old bull market still has more mileage left in the tank.
Even so, the law of gravity is expected to kick in at some point, given the extended period of relative calm since the last big selloff, he said.
The longest streak for the market without the dreaded 5% correction was between December 1994 and July 1996, when the large-cap index rose more than 40%, according to Detrick.
Since June 27, 2016, when the S&P 500 SPX, +0.73% closed 6.1% off its then all-time high, stocks have rallied 19%, while the worst correction so far this year has been 2.8%. In just the past year, the index has set 42 new highs and surged 14%.
It’s not just the S&P 500 that has been operating on adrenaline this year. The Dow Jones Industrial Average DJIA, +0.57% has also set multiple records, notching its 21st 100-point rally of 2017 on Wednesday to close at an all-time high of 21,532.14, according to the Dow Jones Data Group.
But the market’s breathtaking gains could be setting up investors for a harsh fall.
“To put things in perspective, going back to 1950, the average intra-year correction for the S&P 500 has been 13.6%, and 91% of all years have had at least a 5% correction, while nearly 54% of all years pulled back at least 10%,” said Detrick. “In other words, history suggests we’ll likely see that 5% correction before the year is over.”
But history aside, stocks may be able to put off the inevitable for a little while longer, or even dodge the worst if corporate earnings, due to kick off this week, surprise on the upside.
S&P 500 companies are expected to report earnings rose 6.4% in the second quarter, according to John Butters, senior earnings analyst at FactSet Research. However, actual bottom-line growth could top 9% as results have generally exceeded estimates by an average of 4.2% over the past five years, he added.
There is also the potential for a boost from President Donald Trump’s administration if Trump is able to unravel the legislative gridlock over the health-care bill, which many see as a prelude to rolling out other critical policies, including more corporate-friendly tax codes.