Expect 5-10% market correction, expert says

The stock market could see 5-10 percent correction before it heads higher, strategist Steve Auth told CNBC on Tuesday.

That's because the near-term news for the United States has not been great, the equities chief investment officer at Federated Investors said in an interview with "Power Lunch."

"Oil, we think, is heading lower. We think the dollar is heading much higher against the euro. That'll be taken as bad news. A lot of focus [is] on the Fed's next hike, which we think will be June," he said.

Plus, economic numbers hit a bit of a "soft patch," he added, and earnings for the first quarter probably won't be exciting.

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

Still, Auth said, the market will end the year higher, with the S&P 500 hitting 2,350.

"We think this is one of these years in the U.S. that is going to be pretty back-half loaded," he said.

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Jeff Hussey, global chief investment officer at Russell Investments, also wouldn't be surprised by a pullback of more than 5 percent.

He said because of the strong dollar, record-high profit margins and oil prices, which he thinks will start to drag on the corporate sector, Russell Investments has been underweight U.S. equities within its global portfolio since December.

He's emphasizing Europe.

"The sentiment there is pretty bad, the valuations are cheaper and the ECB continues to stimulate. I think you don't want to fight the central bankers anymore," Hussey said.

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Within the U.S., he would stick with a more defensive portfolio and sectors like banks and technology. He'd stay away from yield-oriented sectors like utilities and REITs.

"We are positioning portfolios for a rate rise," Hussey said.

Auth still thinks the U.S. is the place to be.

He likes names like Dominion Resources, Procter & Gamble and Alaska Air.

"Those are all … domestic companies with interest rate sensitivity to them because we do think yields are heading considerably lower from here," he said. "We like the defensives here and we think they've even got some legs beyond that."

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If the market does pullback, Auth said, he'd get more aggressive on cyclical names because that's where the real value is in the market longer term. However, he added, those stocks are now overextended.

DISCLOSURES: Auth oversees the Federated equity team, which has Dominion Resources, Procter & Gamble and Alaska Air in various portfolios.

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