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A stock market correction is coming and volatility will grow midyear, this technical analyst predicts

Jeffrey Bierman, founder of thequantguy.com, says investors can still make money, just not millions

Jeffrey Bierman, founder of thequantguy.com, believes a stock market correction is coming. But he says investors will still be able to “hunt and peck” for bargains along the way. Bierman, who is also a professor at DePaul and Loyola universities in the Chicago area, is warning about an increase in market volatility as the 2024 presidential election season moves into higher gear.

I spoke with him about his technical analysis covering the next six months.

Chuck Jaffe: Jeffrey Bierman, it’s great to have you back.

Jeffrey Bierman: Chuck, we do this twice a year and I do a lot of interviews, but this is my favorite one because of your energy and objectivity. I’m thrilled to be back.

CJ: Are you thrilled with the market because we had a market that rallied, but Santa Claus technically didn’t come to town because the first two trading days of the year were terrible. So are we at a spot where as happy as you are to be on the show, you’re equally happy with the market?

JB: I came on here about a year and a quarter ago when the market was under pressure at about 3,600 [points for the S&P 500] if you recall, and I said, ‘This is where millionaires are made, if you can buy here and hold your nose.’ That paid off big.

I have some good news and some bad news. Millionaires are not made buying at highs here. That’s the bad news. The good news is that valuations are actually more compelling now than they were even back at 3,600. And yet we’ve moved a thousand points higher. So technically speaking, we’re overextended. We’re due for a garden-variety 10% correction.

But I think on that correction, you’ve got to hunt and peck and find some of those good plays out there. I don’t think it’s in tech, but I think financials are going to be a great place to see it out, as well as some health care and, of course, oil once it finds a bottom.

CJ: So you’re calling for a short correction. If we have a correction and it simply is a bull market correction. It’s something that happens during a positive run. What’s your upside potential here? Even if we’re not going to make millionaires?

JB: I think there is a chance that we pull back maybe 10% to 15% this year. So let’s recalibrate. We’re still going to get some rate cuts at likely some point in the second half, if not the first half of this year, and that’s going to be a tailwind to drive us higher. But you’re going to have to let the market digest its move from where it was just two months ago at 4,100 based upon all these rate cuts and where it survived at now.

So if we pull back to maybe the 4,344 area, OK. And maybe at the worst 4,200 for the year, we could end up at the end of this year, maybe 5,000 or even higher simply because lower interest rates allow for [earnings] multiple expansion and lower interest rates are healthy for long-term bull markets.

CJ: But if the market is pricing in six Fed rate cuts this year, which if you look at the indicators I believe technically it is, but I don’t know too many experts who think we’re going to get even close to six rate cuts. If we don’t get those rate cuts, don’t we wind up with a whole bunch of disappointment?

JB: We end up with disappointment from this perspective. OK, so we didn’t get six rate cuts, but if we get three or four? Oh come on now, that still puts a buffer zone or a shock absorber on the downside on the market itself. So if we have a recession, even for a short period of time, it’ll give the market the chance to kind of retrench and rebuild itself.

Markets that are this overbought are not healthy. Markets that actually rebalance the supply demand dynamic and work off a technically overbought condition are way healthier to launch higher. So four rate cuts, Chuck, is better than no rate cuts, but six rate cuts are not likely to occur so the market is just taking back probably a couple of those in the first half of the year.

CJ: Does politics enter the situation this year at all or is politics something that eventually shows up in the technicals but more or less just becomes a positive because in an election year nobody wants things to be too bad?

JB: You stole my thunder. Yeah, the market’s going to get more volatile as we turn the corner in the second half of this year — maybe around May or June, when we start to do the television debates and whatnot, and who are the players, and what are the issues and whatnot, clearly there is going to be some uncertainty around the election. However, I don’t think that whoever wins the presidency is going to make or break this market, because the market’s more focused on Jay Powell than it’s focused on the president of the United States when it comes to running the economy.

CJ: Is there any sort of wild card for you? I mean, we do have two wars going on. They are not events that are technicals, but everything eventually shows up in the numbers. So is there anything in particular that you look at that is your nightmare scenario that you’re otherwise forecasting?

JB: I do have two wild cards. One is I have to ask this question: Why are all these large banks, why have they drained the Fed’s emergency facility for capital requirements? What are they seeing that they’re sucking M2 money supply out of the economy? There might be a wild card of some real estate, dare I say another Silicon Valley Bank or First Republic Bank of San Francisco type of black swan event out there that could put financials temporarily in the penalty box. That’s one event that could derail the market.

The other that could derail the market is simply this, that there is a second wind of inflation where instead of moderating and mitigating down to that 2%, 3% level, the Fed would like to have as a tolerable level that it actually resets higher. Not necessarily back at 5% but we find ourselves kind of wavering for longer [around] 4% for the rest of the year. It upsets investors because investors are looking for rate cuts and you only get three rate cuts instead of four rate cuts or five rate cuts. Those are my two wild cards.

Also read: Top bond forecaster expects higher interest rates.

CJ: Those are your wild cards. But again, the base case: little correction here, little bit of doldrums through the middle of the year, rally toward the end of the year. You may not be making the millions, but you’re going to be happy you were invested.

JB: This could be a flat year to a moderately up year, but the idea to think that we’re going to drop out of the sky this year and have one of those 22%, 23% declines like we had in 2022, the headwinds just aren’t there. You’re getting tailwinds in the form of the Fed offering you an olive leaf to pivot. Valuations are actually pretty compelling in a lot of different industries. I think we might end up with a slightly up year to a slightly down year, but not a runaway year for sure, not like last year.

Chuck Jaffe is a contributor at Equities and the host of “Money Life.”