Why a Serious Stock Market Correction is Overdue

By Mitchell Clark, B.Comm. for Profit Confidential

There is going to be considerable pressure on interest rates and the Federal Reserve very soon, and it’s very likely that we’re going to get some choppy trading action in stocks. The reason for this is, of course, positive economic news, which is increasing the likelihood of a decrease in monetary stimulus. As contradictory as it may seem, good economic news is actually bad news for stocks; that’s just the way the counterintuitive system of the stock market works—buy on rumor, sell on news. But what’s transpired recently goes more like buy on expectations, sell on hints of growth.

While economic recovery is inconsistent, regional, and industry-specific, there is considerable evidence from many corporations that business conditions are improving.

Conns, Inc. (CONN) is a Texas-based company selling appliances, electronics, furniture, and mattresses. The company’s share price has been soaring on genuine operational growth. On the day of its recent earnings report, the company’s shares jumped 15% to $67.00 a share. The stock was trading around $11.00 a share at the beginning of 2012.

According to the company, its fiscal third quarter of 2013 produced record financial results: quarterly revenues accelerated a whopping 51% to $311 million; its retail gross margin jumped 460 basis points to 40.1%; diluted earnings per share grew to $0.66, way up from earnings of $0.35 per diluted share last year; and company management said November retail sales jumped 49% comparatively, while same-store sales grew 32%.

The company said that its biggest comparative gain in sales was in appliances, with growth improving 96%, followed by home offices with sales growth of 77%, consumer electronics at 45% sales growth, and home appliances with 37% sales growth.

The company’s latest quarter beat the Street on earnings and revenues, and management raised its fiscal 2014 and 2015 guidance to well above previous consensus.

Clearly, there are some regional factors at play with the economic growth at Conns. The company’s comparative numbers are impressive and representative of what I consider to be pent-up demand from consumers who have kept a tight fist on their wallets since 2009. (See “Four Companies with Earnings Growth That Shines.”)

And the same can also be said for corporations, which have been unwilling to spend their cash hoards on new plant, equipment, and employees.

With any positive economic news, there is going to be further pressure on share prices and the Federal Reserve’s ability to maintain artificially low interest rates. This is going to make for some serious stock market volatility.

But realistically, there is no trend yet. Massive monetary stimulus and artificially low interest rates haven’t given rise to a new business cycle; rather, they’ve resulted in a reflation of the value of equity securities.

My view remains the same. Blue chips are a hold going into 2014, and I would not be chasing any positions. A serious stock market correction is overdue, and when it finally hits, it will likely be an excellent buying opportunity.