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Correction Call

Recently, we had an Investment Committee meeting and we were discussing the markets and a possible correction. After looking over NDR charts and some Bloomberg data, we had a slight tweak to our view (for the interim period).

Since the beginning of the year, we continued to believe a 10% or greater correction was going to occur in 2014. The writing was on the wall, right? We had a spectacular 2013 and we hadn’t seen a 10+% correction since the summer of 2011. This was the consensus among market participants, not just us.

But after reviewing the data, it seems more likely that we will just muddle through rather than see a drastic correction.

Despite some heavy news already this year (Russia and Ukraine, Iraq and oil prices), the market has shown resiliency.

Many people will continue to talk about a correction and eventually they will be right, but right now it doesn’t seem to be a foregone conclusion anymore for 2014.

Going with consensus doesn’t always lead to a consensus gain

It was consensus, and it remains consensus, that markets will see a correction.

Remember at the beginning of the year when consensus was that rates were going to spike? I mean the Fed was tapering and the economy was growing, rates had to spike. Wrong (so far)!

Now those same people (media included) have shifted to the equity markets. A correction within the equity markets has become consensus. The story has been the lead story for all networks and papers. The correction is going to happen every one says.

The idea that rates were going to rise has now moved to the back burners (which actually makes me think that is more a likely scenario now than a market correction).

And given that we are at all time highs within the market and every day we see an advance we hit a new high, media outlets and consensus seems to be waiting for that correction.

But we don’t see that euphoria yet from clients. We don’t see a strong desire of wanting to get into the equity markets. Rather, we see tepidness from clients and this tends to suggest that we are not yet at that market tipping point.

Cash is the markets buffer

We talk a lot about how there continues to be large amounts of cash on the sidelines… and this hasn’t changed. ICI money market assets are currently at $2.6 trillion, which is much greater than the average levels of $1.8 trillion going back to 1989.