The latest Barron’s cover looks super bullish. It says that its top strategists expect stocks to rise 10% in 2014 on top of the extraordinary gains of 2013.
But drowned out by the bullishness, was an interview with Ned Davis, founder of Ned Davis Research, and strategists Timothy Hayes Lance Stonecypher.
Davis told Richard Rescigno at Barron’s that he expects a stock market correction next year in the 20% range.
“Right now, about 78% of industry groups are in healthy uptrends. That would have to fall to about 60% for us to say the market had lost upside momentum. We also focus on the Federal Reserve, and it’s still in a very easy mode, despite all the talk about tapering. So, those two indicators are bullish.
“However, we’ve looked at all the bear markets since 1956 and found seven associated with an inverted yield curve [in which short-term interest rates are higher than long ones] — a classic sign of Fed tightening. Those declines lasted well over a year and took the market down 34%, on average. Several other bear markets took place without an inverted yield curve, and the average loss there was about 19% in 143 market days. We don’t see an inverted yield curve anytime soon. So, whatever correction we get next year is more likely to be in the 20% range.”
But Davis expects the correction to be followed by a “great buying opportunity.” Davis also expects 2.5-3% GDP growth next year.