Should investors run for the exits or buy the dip?
Here we go again! After a robust nine-year bull run, the stock market is once more confounding investors. With the Dow Jones industrials, S&P 500 and Nasdaq composite pulling back sharply in Monday and Tuesday trading, warnings of the advent of a significant market meltdown have accelerated.
"Head for -- no, run for the exits" is the urgent advice of the reawakened bears. And a number of market watchers who don't fall under the category of professional bears are expressing concern, too, not only about the uninterrupted ramp-up of stock prices but about what could be a looming political upheaval.
"I sense a Constitutional crisis is imminent with Special Counsel Robert Mueller indicting high-level Trump administration officials," warned George Brooks, editor of the daily market blog, "Investors first read."
"I believe President Trump will respond with an attempt to fire Mueller or find another way to obstruct the progress of the investigation" into allegations of Russia's efforts to influence the presidential election, Brooks argued.
He warned that if that scenario unfolds, initially the market will plunge -- but a rally would likely follow. "As the Constitutional crisis deepens, the market will take a huge hit, with the Dow industrials giving up some 13 percent and the S&P 500 by about 12 percent." The reason for the crisis, said Brooks, "is because the Republicans have ramped up their efforts to discredit the FBI and the Mueller probe."
On the other hand, several veteran market watchers contend that the stock market is actually in a "melt-up" scenario in which stock prices will continue their upswing for some time (in spite of the two-day deep decline).
But this melt-up is "very unusual" because it's earnings-driven, argued Ed Yardeni president and chief investment strategist at Yardeni Research. "Past stock market melt-ups, particularly the ones that occurred during 1929, 1987 and 1999, were P/E or price-earnings-led melt-ups," he noted in his Jan. 29 market appraisal.
"That's why we've been raising the odds of a melt-up recently without raising the odds of a meltdown," he said.
Economic booms tend to be followed by busts "associated with speculative excesses during the booms," noted Yardeni. So the boom-bust cycle is very much tied to the melt-up/melt-down credit cycle, he added. But despite all the commotion during 1987, analysts' consensus earnings estimate for the S&P 500 continued to move higher that year. "There was no recession," Yardeni recalled, "and stocks were deemed to be a bargain."
Yardeni pointed out that a melt-up followed by a melt-down won't necessarily cause a recession. "It might be more like 1987, creating a great buying opportunity, assuming that we raise some cash at the top of the melt-up's ascent," he said.
Before the stock market's two-day sell-off, the S&P 500 index recorded 14 new all-time highs in only 18 trading days, noted Sam Stovall, chief investment strategist at CFRA. In addition, 87 percent of the 145 subindustries in the S&P composite 1500 traded above their 50-day moving average.
Moreover, the S&P 500 had advanced 34 percent in price since getting back to break-even from the May 2015-February 2016 sell-off, noted Stovall, "versus the average post-correction climb of 9.5 recent before slipping into a new decline of 5 percent or more."
In all, the latest pullback in equities creates a long-awaited opportunity for the many investors who want to participate or even just to add to their favored stocks. So even though this may be the long-awaited correction -- and may really pound stock prices a lot lower than anticipated -- history implies that investor worries might be unfounded in the near term, said Stovall, and that the market still has further to run.
Indeed, several analysts believe the bull market is far from dead in spite of the recent turmoil.
Some savvy stock pickers suggest that the market dive has stocks that appeared unattainable as their prices continued to climb now looking like opportunistic buys, including Amazon (AMZN), Apple (AAPL), Facebook (FB), CVS Health (CVS) and Microsoft (MSFT).
One stock added to that list yesterday was McDonald's (MCD), as CFRA raised its earnings forecasts for 2018. Tuna Amobi, equity analyst at CFRA, boosted his 2018 earnings estimate by 14 cents a share, to $7.16, and maintained his "buy" rating on the stock, with a price target of $195 a share.
With the stock currently trading at $176, noted Amobi, "McDonald's seems well on track with its financial targets pursuant to its "Velocity Growth Plan."