Is a stock market correction coming?

Joe Fahmy, Managing Director of Zor Capital, joined Yahoo Finance for a sneak preview of what would happen
Video transcript
ADAM SHAPIRO: About 15 minutes to the final bell. The S&P 500 is up around 12 points, almost again by 4,200. Been there and done that, right? Well, one of the guests who called that in the first week of April was Joe Fahmy. He is Zor Capital Managing Director who said we would hit 4,200 with the S&P 500. We have been there.
What's next? Joe will help us answer that. But Joe, I just have to ask you - and if you don't have an opinion, that's fine. The headline that affects many of us on this page is that our parent company, Yahoo Finance, Verizon Media Group, is selling. If you look at big tech companies and this ad dollar rush, you have the giants. You have apple. You have Facebook. This new company - do we have a chance?
JOE FAHMY: I'm not an expert on media companies. But you are absolutely right, I mean, most of the ads go to Facebook and Alphabet. Obviously, companies are trying to be strategic in order to capture some of that market share.
- Let's talk about where the markets are going. As Adam mentioned, you were in our air. They talked about new highs and the S&P 500 at 4,200. Are you expecting a little retreat? Is that what I sense about that last call from you, Joe?
JOE FAHMY: Yeah, I would ... I would say to sum up my stance at the moment: I'm still bullish in the longer term, but only cautious in the short term. Back at the beginning of April, I was expecting the markets to rise for two main reasons, as April is traditionally a strong month and new money tends to flow in at the beginning of the quarter and also in anticipation of the bottom line. So I'm glad the indices achieved my goals.
Below the surface, however, there have been many challenging price moves, especially in growth stocks. You could see it in IWO, the Russell 2000 Growth ETF. That was really pretty flat a month. So I think one of two things happens from here. Either growth stocks stabilize and lift the market higher, or subsurface weakness lowers the market.
And I'm prone to the latter for a number of reasons. The most important thing I want to discuss is what has happened in the past few weeks. So many mega-cap tech stocks posted staggering phenomenal gains. But as I'd like to say, it's not the news. It's the market's reaction to the news. And they were sold, which only told me that the big institutions are selling in strength.
ADAM SHAPIRO: Joe, when we talk about where we're going - and you called it the 4,200. But you also talk about giving back April profits in the next two months. So you're not exactly bearish to the investors watching right now. But it sounds to me like we're going sideways this summer. And if we've moved earnings expectations forward, I think no one got bad if they took profits early on. Perhaps it is time to do that and wait even longer than the end of summer.
JOE FAHMY: Yeah, that's a great point. I think people should make decisions based on their timeframe and investment goals. Statistically only, it wouldn't hurt if the S&P average was around 10% a year, and we've grown over 11% so far this year - it wouldn't hurt anyone if we were overwhelmed with a bit of profit. I also think the tax season has been extended to address some other factors. The tax deadline was extended to May 17th this year. But because 2020 was a strong year, some people could sell ahead of time to raise money to pay their tax bills.
However, if you have a longer term timeframe, the background is that the economy is slowly returning to normal and earnings continue to pick up. And most importantly, the Fed backdrop is very favorable to stocks over the longer term. I don't think there are any signs that they are going to hike rates or cut their bond purchases anytime soon. As long as we have this equity-friendly background, I have been able to see in the longer term that the market is still - the bigger picture is intact.
- Well, we have about a minute left. However, you mentioned this favorable backdrop for the Fed for equity markets. We've talked a lot about inflation. How does that fit into your point of view? How do you feel about inflation? Is that even important?
JOE FAHMY: Yeah, I don't know what the Fed measures inflation by because they say there is no inflation except for everything we spend money on. So I don't know what to measure it against. But one thing I'm going to say about the 10-year rate of return is that assuming the economy normalizes again, it would make sense for the 10-year rate to revert to what it was in January 2020 would mean somewhere around 1.8% or 2% which is traditionally still low.
However, this could keep the pressure on tech stocks - tech stock multipliers. As the 10-year period rises, there is a correlation with a decline in the multiples of technology stocks. So that's another reason. Again only cautious in the short term, but still optimistic in the long term.
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