Stocks will see a 20 percent correction at the start of 2015 as the U.S. Federal Reserve begins to raise interest rates and investors feel the effects of a world without cheap money, one strategist told CNBC.
The Fed is set to end its massive bond-buying program in October – a policy that has been blamed for fuelling rising stock prices over the past few years. At the same time, analysts are expecting the U.S. central bank to introduce its first interest rate hike since 2006.
All eyes will be on Fed Chair Janet Yellen next week when she delivers a highly anticipated speech at the annual get-together of central bankers in Jackson Hole. While the market expects her to remain dovish – a move supportive of equities in the short term - Michael Gallagher, director of research at IdeaGlobal, said a 20 percent stock market correction would come in the first quarter of 2015.
"The odds are that we'll see the same broadly dovish message coming from Yellen and that will provide reassurance for the markets," Gallagher told CNBC in a TV interview.
"I think where the problem comes for the markets is when the Fed starts talking about tightening then the underlying economic reality…will come into sharper focus and there's a big market correction. We think that's coming probably Q1 2015."
'Retest S&P highs'
The timing of a U.S. interest rate hike has been thrown into doubt by the mixed messages coming from the U.S. economy. Bumper second-quarter growth of 4 percent in the U.S. was quickly clouded by a slew of weak data. The economy added a less than expected number of jobs in July, while wage growth remained stagnant. Retail sales for July also remained almost unchanged from the month before, pointing towards a sluggish recovery in the U.S.