For the past two and a half months, there’s been lots of risk and uncertainty in the air.
After the Dow Jones Industrial Average
DJIA, +1.91%
and the S&P 500 Index
SPX, +1.70%
scaled all-time highs Jan. 26 (the Nasdaq Composite Index
COMP, +1.91%
topped out March 12), we entered a new era of volatility. The Dow soars hundreds of points one day and plunges hundreds more the next — often in the last hour of trading. The CBOE Volatility Index
VIX, -3.17%
or VIX, a common measure of market risk, spiked above 37 on Feb. 5 and has hovered in the high-teens and low-20s for weeks, double its multiyear low of 9.14 in November.
The 88-year-old John Bogle, founder of Vanguard, said he has “never seen a market this volatile” in his 66-year career.
And with all the geopolitical uncertainty — from a threatened trade war with China to the promising but risky dialogue with North Korea to the dangerous conflict in Syria — some investors have started worrying this nine-year-old bull has topped out and a new bear market in stocks already has begun.
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To which I say: Hold your horses. The big daily (and hourly) point swings mask the fact that by the new April 2 closing lows, the Dow had fallen a mere 11% and the S&P 500 only 10% from its record high. (The Nasdaq has fallen by less than 10%.) Although there’s lots to worry about, there are also some fundamental and technical reasons not to throw in the towel on this bull market just yet.
Here are three of them:
1. Earnings are good and the economy remains strong. I hate to sound like a broken record on this topic (remember those?), but the fundamentals are very solid. Companies in the S&P 500 are expected to report annual earnings per share growth of 17% for the first quarter. That would be the best quarterly growth in seven years and it follows a quarter in which 77% of S&P 500 companies beat revenue growth estimates, the most since FactSet Research started tracking the data 10 years ago.
Sales growth is much less amenable to corporate spinning than earnings per share. It reflects a truly strong economy with GDP growth in the high 2% range, 4.1% unemployment, and job increases of around 200,000 a month so far this year. And this is all before the new round of corporate tax cuts kicks in. So, if there’s no all-out trade war, the prospects for recession are low.
2. Inflation remains subdued and interest rates aren’t headed much higher. Again, despite many warnings and much hand-wringing, we still don’t see much inflation. Yes, companies are going to extraordinary lengths to fill open positions, but that’s not translating into higher wages yet. Last week’s jobs report showed average hourly earnings increasing at a 2.7% annual clip, well within the comfort zone.
Given that, it’s hard to see how Jerome Powell and the Federal Reserve will raise rates more than three times this year — four, at most — unless we see a sudden acceleration of wages and inflation. As of now, the Goldilocks economy is alive and well.
3. Markets remain in a long-term up trend. The Dow’s 200-day moving average, a key indicator of medium-term technical support, sits at 23,478.76, about 500 points below Monday’s closing price. The S&P 500’s 200-day moving average was 2,594.59, 20 points below that index’s close. Both indices have dipped below their 200-day averages only to rebound, and Tuesday’s strong rally could indicate a successful retest of February’s lows was completed last week. The Dow would have to plunge all the way to 21,293 and the S&P 500 to 2,300 before they reached the 20% decline that officially determines bear markets.
What could cause panic selling? More Trump risk, from further escalation of trade tensions with China (which eased when Chinese President Xi Jinping offered to cut some tariffs and beef up intellectual property protection) to a massive presidential freakout in response to Robert Mueller’s or other investigations of him and his cronies. So could a real international crisis in the Korean Peninsula or the Middle East.
But we have a long way to go until this correction turns into a bear market. That’s why I’m sticking with stocks, at least for now.
Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.
Source : MTV
