Daily Gains Letter

Investor Beware: NASDAQ Passes 5,000, but Market Correction Looms

By for Daily Gains Letter |

Investor BewareThe NASDAQ may have passed 5,000, but investors shouldn’t get caught up in the excitement. A market correction may just be on the horizon, especially when you consider factors affecting the global economy.

NASDAQ, Stock Markets Near Highs, but Bull Market Slowing

After the NASDAQ’s recent breach of the psychological 5,000 level, there was talk about a move to another record at above 5,104, last encountered 15 years ago. At that time, in 2000, for the stock market, it was both a period of excessive greed and jubilation.

After the recent records by the DOW and S&P 500, I fully expect some pausing in the stock market. We are beginning to see that. Following a strong February, the major stock market indices are negative in March and are coming off their respective highs.

Now, I’m not saying the bull market is drawing to a close; rather, I’m saying that the gains we witnessed in February are not sustainable at the same rate. Prior to the stock market open on Monday, the DOW was up a mere 0.18% this year and the S&P 500 was up 0.59%.

The reality is that the bull market is now six years old after trading at a bottom in March 2009. I doubt the bull is dead yet, but I feel the beast may be slowing. I still believe the stock market will close up higher by year-end in just over nine months’ time, but the advance will be met with hurdles. We witnessed this in 2014, and it looks like we’re following a similar pattern this year.

Global Economic Factors Suggesting Coming Stock Market Correction

Investors in the stock market are fearful of higher interest rates. The improvement in the unemployment rate to only 5.5% in February will catch the attention of the Federal Reserve as far as the timing to increase interest rates, which will also push bond yields higher to the detriment of the stock market.

While the eurozone is showing some market buying driven by the European Central Bank’s (ECB) bond buying, the region still faces some headwinds from the mess in Greece, where a revised debt austerity package proposed by Greece was flatly rejected. One element of the revised austerity has the Greek government asking tourists to help them collect taxes in exchange for a subsidized or free stay. What a crazy idea, especially given the government cannot collect its own taxes.

In Europe, you also have embattled Russia and its deteriorating economy that will also impact European gross domestic product (GDP) growth. Putin appears to be way off tangent, and there are some crazy things happening there, namely the recent execution of the leader of Putin’s opposition.

In China, the GDP estimate was cut to seven percent this year by the government, down from 7.5% in 2014 and the lowest reading since 1990. The reality is that the true growth could be already at below seven percent. A failure to drive consumer spending in the country’s new strategy for growth is hurting. The February trade numbers show a strong rise in exports, but a disappointing 20% decline in imports, which could suggest weakness in domestic consumption—a key factor for the government’s new strategy to grow the Chinese economy.

What Investors Should Do with a Correction on the Horizon

As many of you know, I believe the stock market looks somewhat overextended at this point and I advise taking some money off the table. The stock market could correct by around five percent as it has in the past six years after big run-ups. I would view such occurrences as a buying opportunity.

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