What’s so healthy about a “health correction” in stocks? Here’s what the experts say

A lot of people are talking about the market downturn recently. And they say it might be a good thing.

Ted Beck, head of Morgan Stanley, recently said the firm “welcomes the possibility” of withdrawals of 10% to 15%. Investment strategists at Charles Schwab (SCHW), Edward Jones, and Invesco have described the recent market movement as “healthy” and “opportunistic.” The Wall Street JournalInvestors “could use a good, long-term bear market,” Bloomberg’s Spencer Jakab said. Cryptocurrency influencer Anthony Pompliano described Bitcoin’s recent decline as a “very healthy reset.”

Their comments arrive just as some street veterans are beginning to call a bubble in the stock markets, suggesting among other things that large-cap stocks of companies like Nvidia (NVDA), Microsoft (MSFT) and Amazon (AMZN) may be due for significant writedowns in value — and suggesting that a return to colder times may not be so bad.

It can seem counter-intuitive. No one wants to see their wallet shrink, right? But some experts say that after more than 15 years of seeing stocks rise, the market could take a hit — because corrections, they say, could trigger a needed behavioral check; Washing accumulated leverage; and realign stock valuations with company fundamentals.

“I would rather not live through a bad recession and a long bear market,” Ben Carlson of Ritholtz Capital Management recently wrote. “But I know those risks are there…. That’s why I diversify. I don’t use leverage in my portfolio. I don’t have concentrated positions. The name of the game in a long bear market is to survive, mentally and financially, to live another day in the markets.”

Long bull markets can incentivize investors to take on more and more leverage — in short, borrow money to amplify returns — in ways that can lead to problems, Jim Masturzo, CIO of multi-asset strategies at Research Affiliates, said in an interview with Investopedia. He said the new crop of retail investors began to “adapt” to easy 10% returns — so much so that they began chasing huge gains in a “swing for the fences approach,” trading meme stocks and cryptocurrencies.

“Once that starts to happen, if you have all this excess risk and excess leverage, you are going to have a sharper, more violent and more difficult correction than if the market were, for lack of a better analogy, all the way down eating its vegetables,” he said.

Magazine Jackab recently noted that markets haven’t had a major bear market in a while, “leading to a dangerous sense of complacency.” Historically, it takes stocks approximately 81 months, on average, to reach a new high after a bear market accompanied by a recession, and 21 months without one. In the past 15 years, downturns lasted less than eight months before reaching previous peaks. After the Emancipation Day decline, the S&P 500 hit a new high just four months later.

In light of investors’ growing concerns about AI stock valuations — and fears others call a bubble — Ocean Park Asset Management CIO James St. Aubyn would be more concerned if the S&P 500 rose 50% from these levels than if it fell 25%.

“You don’t want to see complete euphoria in the market,” he said.

The S&P 500’s forward price-earnings ratio through the end of October was 22.9, higher than its 30-year average of 17.1, according to JPMorgan Asset Management. While the index has given up some of its gains since then, that number — which recently stood at 22.8 per MacroMicro — is still high.

St. Aubin noted that even if the S&P lost a quarter of its value, it would not score what he called, “Oh my God, this is going to ruin my financial plan.” The benchmark will be around 5,000, slightly above the lows seen in April – and will remind investors that markets go both ways.

Stocks don’t necessarily need to fall, according to St. Aubin. They could instead move sideways and let the companies’ fundamentals catch up, but it’s hard not to be wary when investors are pricing those companies to perfection without any degree of certainty that they will succeed, he said.

“Everything has to go well for the valuation multiples to make sense,” he said. “when [the market] Resetting, earnings growth expectations – and there are those who say they are too optimistic – are returning to something a little more achievable, a little more realistic.