There’s no shortage of stock market analysts reassuring American investors that the recent, early February stock market correction was “long overdue” and “completely normal.”
The month began with the market losing more than 1,800 points by Feb. 5 after a series of rocky sell-off days. But market observers say it wasn’t unexpected.
“It’s our view that market correction appears quite typical and provides some relief from concerns regarding frothiness,” said Jason Pride, investment strategist at Glenmede. “In spite of domestic market declines, the global economic expansion appears poised to continue.”
A temporary lapse in confidence over economic touchpoints also fueled the February selloff.
The U.S. Bureau of Labor Statistics’ Feb. 2 report depicted wages increasing 2.9 percent year-over-year in January versus 2.7 percent in December and the 2.5 percent average rate increase in 2017, said Brad Neuman, client investment strategist at Alger.
“Investors suddenly became anxious about robust economic growth, higher inflation, and interest rates, but there’s no real correlation between a single wage data point, or for that matter, any single data point, and the ultimate direction of the stock market,” Neuman said.
After hitting an all-time high on Jan. 26, the S&P 500 Index did decline “into correction territory,” Neuman said. “But it’s too soon to worry that rising wages and higher interest rates will trigger a bear market and recession.”
Plenty of Positive Signs
Investors would do well to focus on the following, more positive stock market trends going forward, wrote Neuman and Alger chief executive officer Dan Chung in a research note.
Time for a decline. The market was long overdue when considering that more than 18 months passed without a substantial market decline, Neuman and Chung wrote.
“The most interesting aspect of this current market environment is that up until late January, more than 18 months passed without a correction of more than 5 percent – the longest such stretch of low volatility in many years,” they added.
The market is normally volatile and has intra-year corrections, but that does not mean that the bull market is done, Neuman and Chung wrote.
No time to worry. The U.S. economy remains quite strong, and nowhere near recessionary, Neuman and Chung said.
“Our belief is that interest rates and inflation need to be much higher on an absolute level before they substantially raise the prospects of an economic recession in the U.S. and, therefore, a decline in corporate fundamentals that can spark a decline in equity valuations,” they said.
Interest rates no factor. Inflation and increases in bond yields are common when the economy is expanding.
“With historically low interest rates and benign inflation, higher bond yields and wage pressure are unlikely to derail the bull market, at least not in the foreseeable future,” Neuman and Chung said.
Interest Rates a Key
Overall, rising interest rates could support the equity bull market by prompting investors to sell bonds in favor of stocks, the Alger report stated.
“A steady decline of interest rates has resulted in $1.8 trillion in assets flowing into taxable U.S. bond funds, including ETFs, over the past decade, while only $0.2 trillion has gone into equity funds and ETFs, according to Morningstar,” the report found.
Overall, equities are inexpensive relative to bonds.
“The earnings yield of equities is more than 300 basis points greater than the yield of the 10-year Treasury as compared to the 55 basis points median for the half-century prior to the global financial crisis,” Neuman and Chung said. “If stocks had been trading at very high price-to-earnings or low yields, such as those of Treasury bonds, then a rise in bond yields would hurt stocks dramatically.”
Essentially, stocks never fully priced in low interest rates, so it stands to reason that they shouldn’t be hurt by higher rates, they added.
Overall, the S&P 500 regained nearly 8 percent from its February low within 10 trading days of the market correction, and the VIX index calmed, said Richard Turnill, global chief investment strategist at BlackRock.
Through the end of February, the stock market regained 50 percent of its correction losses.
‘Strong Earnings Momentum’
Bullish on the U.S. market, BlackRock upgraded U.S. equities “because of very strong earnings momentum,” and consequently are now neutral on European stocks, Turnill said. “Impending fiscal stimulus is supercharging U.S. earnings growth expectations.
“U.S. stocks have already retraced a large part of their early February losses, but we believe the coming positive effects of new U.S. tax and spending plans are still underappreciated by markets,” Turnill said.
That seems to be the common response to early February’s market malaise: going forward into spring full speed ahead, Wall Street experts believe.
“Historically corrections are a standard part of any market cycle,” said Rick Wedell, chief investment officer at RFG Advisory, a hybrid RIA in Birmingham, Ala. “The recent smooth rise in prices experienced from February 2016 until last month was the exception, not the norm.”
For context, the current correction is the fifth in this current bull market cycle, from the S&P downgrade of U.S. debt in 2011 to the response to the spread of negative interest rates in 2016.
“All of those corrections were event-driven market moves that had a narrative supporting the market behavior, and in every case markets returned to trend after participants absorbed the new information,” Wedell said.
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at email@example.com.
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