The calls for a stock market correction are beginning to blow through the streets of Wall and Broad.
We aren’t talking about the reiteration of a decade-long Nouriel “Dr. Doom” Roubini type call for a stock market crash due to the always easy excessive valuation and bloated government debt arguments (the S&P 500 is up 506% since March 1, 2009). Instead, we are referencing stock market correction calls of at least 10% by some of the brightest minds on Wall Street, whose work I really respect.
“You should always be expecting a 10% correction. If you’re investing in equities, you should be prepared for that at any time,” Morgan Stanley’s Chief Investment Officer Mike Wilson told Yahoo Finance Live. “The bottom line for us… is the risk reward is not particularly great at the index level from here, no matter what the outcome is. That’s why we don’t have any upside to the S&P for the rest of the year.”
Roger that.
Deutsche Bank strategist Binky Chadha also recently cautioned on the chance for a near-term correction in markets. Bank of America’s Savita Subramanian has also issued a warning on the market of her own. I would even read Ark Invest’s Cathie Wood recent selling of Tesla’s stock as a red flag on high multiple stocks.
The question investors need to be asking is straightforward. Should you give a hoot about these calls from top Wall Street minds? I fancy the answer is yes, for a few reasons.
For one, peek under the hood of the market and you will see evidence of a rolling correction (as Wilson likes to refer to it as) that could soon bubble up to the headline-grabbing major indices. About 90% of Russell 2000 stocks have already fallen into a correction, as Bloomberg notes. Morgan Stanley’s work reveals that the average stock in the S&P 500 is down 10% from its 52-week high. Outflows from cyclical stocks since June 15 have tallied $15 billion, according to a recent Jefferies note.
These are indications of shifting sentiment in markets, and it’s shifting with good reason.
Within a week, household name companies such as Sherwin-Williams, United Airlines, Delta Air Lines, Southwest Airlines and PPG Industries all issued third quarter earnings warnings due to the impact of the Delta variant (among other factors). And MGM Resorts told investors last week cancellations are picking up. More of this negative commentary lurks as companies present at investment banks this month.
So in other words, the fundamentals that have underpinned the market’s rally up until September have changed for the worse. Don’t let the hardcore bulls tell you otherwise, the proof is in the pudding (large companies’ warnings).
Meanwhile, all of this unfolds just as super accommodative Federal Reserve policy — a big driver of the stock rally during the pandemic — is poised to abate by year-end. Wilson told me investors need to be cautious on FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks ahead of Fed tapering, which sure makes a lot of sense since these stocks go down with the broader market, given their size and importance.
All of this isn’t to say you move to all cash and bitcoin and take refuge in a backyard underground bunker. But it may be time to take some profits on winning positions and wait for more opportune entry points. There is nothing wrong with banking winnings.
According to recent trading updates, Ark Invest’s Wood has been selling shares of Tesla in her Ark Innovation, Ark Next Generation Internet and Ark Autonomous Tech & Robotics ETFs. The 180,000 shares sold by Wood amount to $139 million, per Bloomberg. Tesla’s stock is up 21% in the past three months, hence it’s not a shock to see Wood selling a bit of her most high-profile position. Wood recently told Yahoo Finance Live that she sees fair value for Tesla at $3,000 a share (Tesla shares are currently trading at $736), so I wouldn’t expect her to completely exit the name that put her on the map anytime soon (if at all). Wood continues to view Tesla as years ahead of others in the globally expanding EV market.
So don’t call me a fear monger on Twitter, I’m not trying to sell you anything here.
Here’s one company I am watching this week:
Chevron: With ESG-focused activist investor Engine No. 1 reportedly kicking the tires on Chevron (CVX) after scoring a major win against the fat cats at Exxon earlier this year, Chevron executives will look to keep their cushy gigs by holding an environment-centric presentation on Tuesday. The event titled “Energy Transition Spotlight,” will outline how Chevron “will plan to lower carbon intensity in our operations and grow lower carbon businesses.”
No doubt Chevron CEO Mike Wirth (who joined in 1982 straight out of the University of Colorado, per his LinkedIn profile) enters the event with a few stains on his CEO report card. First, Chevron shares are down 18% since it announced Wirth as CEO on Sept. 28, 2017. No, he can’t hang his hat on Chevron’s stock outperforming oil rivals Exxon and BP during that span (both are down more than 30%). Chevron stock is still down, while the S&P 500 is up 77%. Also, Chevron took a $10 billion asset write-down in late 2019 due to weak gas prices. Seeing as Wirth is a Chevron lifer, he deserves to shoulder some responsibility for being part of a team putting those assets into the ground.
And lastly, where was Chevron’s ESG focus before. Nowhere. So hopefully for Wirth’s sake, Tuesday’s presentation resonates with investors and ESG activists like Engine No. 1. Because if it doesn’t, Chevron could find itself on the losing end of an Exxon-like battle as Engine No. 1 is riding high post-Exxon and eyeing targets. That potential battle may be good for the planet, but probably not for Wirth who still holds the chairman position. Despite the stock’s nosedive he pulled in $29 million in total compensation in 2020. Engine No. 1 did not respond to a request for comment.
