Wall Street bulls are warning of a 10% to 15% pullback

U.S. traders return from a long weekend on Tuesday in anticipation of more volatility, with the sharp drop in technology stocks in the second half of last week drawing attention.

As the U.S. presidential election approaches, investors expect more market volatility in the weeks and months ahead. Market watchers say markets are likely to become more volatile no matter who wins the Nov. 3 election. The economic uncertainty caused by coVID-19 is still looming, and the possibility of delays due to mass mail-in ballots has unnerved some investors. Adding to the risk is increased exposure to large tech stocks.

Ed Yardeni, a longtime Wall Street bull, thinks the U.S. stock market is in a correction and a 10 to 15 percent drop could be healthy.

The President of Yardeni Research expects the market to keep falling as investors look to reduce their focus on the biggest winners of the historic rally: super-large growth stocks, especially technology stocks.

But that, he argues, is not a bad thing.

“Since March 23, there have been huge swings in the market,” he said in an interview on CNBC. The Nasdaq is up about 70 percent. This is a melting up. Not as big as 200% in 1999. But I don’t want to see that happen again. So I take some comfort from the pause in the market rally. It’s a healthy development.”

The tech-heavy Nasdaq index just emerged from its worst week since March 20. At Friday’s close, the NASDAQ was down more than 6 per cent from Wednesday’s record high. Meanwhile, the Standard & Poor’s 500-stock index, which is heavily weighted in technology stocks, had its worst week since June 26.

“It’s disconcerting to see five stocks representing 25 percent of the S&P 500,” Yardeni said. “But these stocks have actually been corrected now and are leading the decline.”

Yardeni spent decades on Wall Street, overseeing investment strategy for firms such as Prudential and Deutsche Bank. He was always worried that if all markets melted, it would trigger a crash.

Now he believes the broader market is vulnerable to a 10 to 15 per cent sell-off. Yardeni expects the process to take days, not weeks or months.

While he believes the fundamentals of tech stocks remain strong, he expects cyclical stocks to become more attractive as the economy improves and a coronavirus vaccine is likely to be released in the coming months.

“We are likely to see an expansion into what people call value stocks — more specifically, financial stocks,” Yardeni said. But that doesn’t mean tech stocks won’t make a comeback. There was so much cash on the market during the mad chase for cash in March, and it was financed by fiscal and monetary policy.”

His base call is for the S&P 500 to close at 3,500 this year, which would imply a 2% gain from Friday’s close.

“I’m kind of leaning toward this market consolidating in the coming months,” Yardeni said. But I think next year the S&P 500 could go up to 3,800, or even a little bit higher.”

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