Double-digit Correction Possible
Last week marked the worst week of the year for stocks. Monday started off on a bad foot as well. As the LPL strategists have noted for many weeks, after substantial gains since the late December lows, some type of correction should be expected.
Following a 25% bounce, a few percent pullback is actually quite normal. The strategists continue to think a correction of near double digits is possible, but the strength in the underlying economy may present a buying opportunity.
On the US-China tariff issue, the U.S. increased tariffs from 10% to 25% on $200 billion of Chinese imports. China is striking back and raising tariffs on nearly $60 billion worth of goods.
Still, LPL strategists remain optimistic that a trade resolution can occur soon. Both China and the US have a lot to lose in a trade war. They were close to a trade deal earlier this month, so the remaining issues can likely be ironed out.
Covering other economic news, the LPL strategists talked about the fact that first quarter productivity rose at the fastest year-over-year pace since 2010. That’s an important necessity for continued economic growth. Productivity during the current economic expansion has been historically low. Seeing signs of higher productivity could mean the expansion still has legs. Higher productivity helps keep profit margins high, allowing for higher wages and better gross domestic product growth.
Since 1970, the S&P 500 has pulled back nearly 9% from peak to trough on average during the first five months of the year. This helps to put in perspective how rare the first part of 2019 has been and why some type of correction could be perfectly normal.
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