ECRI'S Lakshman Achuthan: A chart suggests another 10 to 20 percent correction will strike stocks

Stocks may be on the brink of another correction.

Despite 2019's strong start, the Economic Cycle Research Institute's Lakshman Achuthan believes the market remains in a danger zone, because there's evidence economic growth is still decelerating.

"The elephant in the room remains the cyclical slowdown. And, as long as that slowdown is in play... the risk of a correction remains. It hasn't gone away," the firm's co-founder said Friday on CNBC's "Trading Nation."

Achuthan, an economic forecaster, draws his conclusion from a chart showing S&P 500 Index corrections and slowdowns over the last decade. The shaded areas represent U.S. growth rate cycle downturns.

"It's really about the direction of economic growth. It accelerates and decelerates. It goes in cycles," he said, noting that a during a slowdown the "risk of a 10 – 20 percent correction pops way up."

Achuthan used the same chart last year to help build his correction prediction. His indicators began showing signs of a growing economic slowdown in late 2017. A few months later, he officially turned cautious.

"We were very alone last year saying 'hey, there's a slowdown coming,'" he said. "They bring with them a lot of stock market correction risk."

By last summer on "Trading Nation," Achuthan was warning investors that a 10 to 20 percent correction would likely hit stocks. By Dec. 24, the Dow and S&P 500 were trading 20 percent off their all-time highs.

Stocks have staged a considerable comeback since then. So far in January, the Dow and S&P 500 are up more than 6 percent. However, Achuthan contends nothing has fundamentally changed since last year's downdraft.

"We're still in this slowdown. There is more to come. It is not over," he said. "It's not an all clear signal until those leading indicators turn back up."

But it's not all bad news.

He is not predicting the economic slowdown will turn into a recession. According to Achuthan, it's possible growth will begin re-accelerating within the next couple of quarters — particularly if international markets show signs of recovering.

"The United States does exist inside the global economy, and we're plugged in. It's important to us," Achuthan said. "Maybe that's where we need to see the bottoming first."


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more