The stock market’s volatile start to the fourth quarter has some investors wondering if it’s a scene setter for a proper bear market later this year.
A growing number of Wall Street banks have said the equity market looks vulnerable. Morgan Stanley recently said it sees growing risk of a 20% drop in the S&P 500 as evidence starts to point to weaker growth and falling consumer confidence.
So far in October, stocks have swung between steep gains and losses while the so-called fear gauge, the CBOE Volatility Index, (^VIX) has shot above 20, after spending much of the summer in the mid-teens.
D.R. Barton, principal at Woodshaw Financial Group, told Yahoo Finance Live there could be more downside ahead, but not enough to completely derail the market bulls.
“I don't see this as the big one, the big pullback where we're going to go down 20% and get into bearish territory,” Barton said. “And there's a bunch of reasons why, but the big one is we're still awash in so much money. That overcomes so much other bad news that I think that's the one umbrella that's still going to keep this market propped up for a while.”
Investors have been preoccupied with a range of issues, from rising inflation and persistent supply chain snarls to the debt crisis at China’s Evergrande Group, and a looming debt ceiling deadline that could thrust the U.S. into its first-ever loan default.
“All of those overhangs are there,” Barton said. “But the thing that I've seen over and over again is every time we get one of these pullbacks, the market participants go, ‘yeah, but I don't want to miss out if we get another big leg up.’ And I think that's what we're going to see coming into the end of the year, one more big leg up before we have any sort of reckoning.”
A recent jump in bond yields spooked investors and deflated the stock market, but Barton said barring a sudden spike in rates, a gradual increase in Treasury yields will ultimately be a positive for investors.
“We've got to remember one of the things that tells us if those bond yields are trending up is the expectation for an expanding economy, and that is not a negative for the market. So gradual, good. Big, not so good, as far as the equity markets are concerned,” he said.
Barton said he uses big down days as opportunities to cherry-pick the stocks that have been on his wish list.
In anticipation of an infrastructure bill becoming law, Barton said he’s a buyer of industrials and materials heading into next year.
“I love these pullbacks right now, and until the markets tell me something drastically different on the technicals I'm going to continue to be,” he said. “Any time you get the big techs pulling back, I like to take a swing and nibble at those.”
Alexis Christoforous is an anchor at Yahoo Finance. Follow her on Twitter @AlexisTVNews.