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Summary

  • Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.
  • Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high.
  • The risk of stocks selling off on the Federal Reserve’s actions is diminishing.

The monetary environment is still highly favorable to stocks and should continue to be so well into 2015. However, while this market can handle higher interest rates, stocks can only advance in a higher interest rate environment if gross domestic product (NYSE:GDP) growth is there to back it up.

Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high. Accordingly, it's worthwhile reviewing your exposure to risk, particularly regarding any highflyers in your portfolio; they get hit the hardest when a shock happens.

Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.

The risk of stocks selling off on the Federal Reserve's actions is diminishing. The marketplace is well informed about the central bank's intentions and it's quite clear that Fed Chair Janet Yellen doesn't want to do anything to "surprise" Wall Street.

I still view this market as one where institutional investors want to own the safest names. The economic data just isn't strong enough for traditional mutual funds and pensions to be speculating.

This is why the Dow Jones Industrial Average and other large-cap dividend paying stocks are so well positioned. They offer great prospects for increasing quarterly income, some capital gain potential (still), and downside protection compared to the rest of the market.

Of course, all stocks are risky. An equity security is priced in a secondary market where fear, greed, emotions, and a herd mentality are part of the daily pricing mechanism.

Accordingly, anything can happen to any stock-anything. Therefore, a portfolio of stocks is well served by some diversification among businesses and industries, and a key part of stock selection should include the earnings reliability any potential holding offers. (See "My Top Tech Stock for Wealth Creation.")

With the stock market trading near its all-time record-high after a massive amount of monetary stimulus, I view stocks as risky; therefore, retirement or savings portfolios should be skewed towards blue chips and this includes picks in traditionally faster-growing industries, like technology and health care.

Risk is something that many investors pay more attention to after there's been a shock to the system.

No doubt, considering where we've come from, stocks have been-and continue to be-due for a material price correction. So far, we've really only had periods of price consolidation since the March 2009 low.

There's no reason to expect this trend to change near-term, but a full-blown stock market correction (10%-20%) should be something to expect at this stage in the cycle.

In the historical context of a secular bull market, which I believe we're in right now, stocks can experience massive corrections and the U.S. economy can experience it's next recession.

The Federal Reserve has publicized its intentions based on current economic data and most of Wall Street expects a new tightening cycle to begin later next year.

There is still potential for capital gains with stocks going into 2015, but this market is primed for a sell-off.

All it needs is a catalyst and big investors will book their profits. Accordingly, individual investors should not overlook the importance of re-evaluating portfolio risk for such an eventuality.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional Disclosure: This article was written by Mitchell Clark.

Source: Why A Full-Blown Market Correction Should Be Expected