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Odds favor a 10%-20% correction: Strategist

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

Stocks could be setting up for a 10 percent to 20 percent correction, and the odds are good that it will be soon, according to Sam Stovall, chief equity strategist at S&P/Capital IQ.

Stovall has been expecting a 10 to 20 percent correction this year, but he says it's more likely to begin during the second quarter, based on historic market patterns. The S&P 500 was down 4 percent from its April 4 high in Tuesday trading.

"We've gone 30 months without a decline of 10 percent or more. The average is 18 months. It's just a matter of time," he said.

Stovall also says historically, corrections are likely to occur during midterm election years, when the declines have averaged 19 percent in the S&P 500. He also expects the year to end positively, and points to the average 10 percent returns in years after gains of 20 percent or more in the S&P 500.

"The reason why I said a swoon before June is that the second quarter is by the far the worst of all quarters on both a price change and in frequency of decline basis since World War II for the S&P 500," he said. "None of which points to a guarantee, but simply in my opinion increases the likelihood some time in this second quarter."

He said midterm election years are more likely to see a decline in part because in the third year of a presidential term, the party in power is more likely to find ways to stimulate the economy. That also helps the economy in the fourth year, he said.

Even if there's a steep market decline, Stovall said the S&P typically recovers quickly. "We could see a 10 to 20 percent decline, but I remind people the best three quarters immediately follow the worst two. Declines of 10 to 20 percent—and we've had 19 since World War II—take an average of four months to get back to break even," he said.

By CNBC's Patti Domm

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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