Too late to join the stock rally? Maybe not
A big part of this year’s stock market rally stemmed from a move by many large investors to “buy the dips.” But lately a significant number of portfolio managers have started buying into the currently rising price levels as the major indexes climb to fresh record highs or hover near their tops.
The Dow Jones industrial average racked up its ninth consecutive record high Tuesday, closing at 20,775. And although the S&P 500 and Nasdaq Composite both slipped with single-digit losses on Wednesday, the former notched its all-time high a day earlier at 2,365 while Nasdaq did the same, leaping to 5,866.
The question for many investors, particularly those who have yet to fully participate in this rally, is: Should they chase stocks despite how fast their prices are escalating?
Buying stocks whenever there’s a pullback invariably pays off over the long haul in a bull market. But the tricky issue now is to determine how sustainable this uptrend will be, considering the political challenges confronting the new Trump administration even as the economy’s growth continues to demonstrate strong underpinnings.
More than a few savvy market analysts believe the positive economic fundamentals justify buying into this market despite the murky political environment and continuing economic challenges.
True, candidate Donald Trump’s campaign promise that he would cut taxes, reduce regulations and spend massively on infrastructure improvements has helped energize this year’s market rally. But the major spur that kicked up stock prices came from the positive forecasts on corporate earnings for the fourth quarter and the first half of 2017.
So it isn’t surprising that the bears are hoping that the time has come for some digestion of the market’s recent sizable gains. But any such pullback “will not likely result in the end of the bull market,” asserted Sam Stovall, chief investment strategist at CFRA Research. He said he still believes the “S&P 500 will close up for the year, based on improving earnings-per-share estimates and the likelihood that inflation will remain subdued.”
For the skeptics who may need additional encouragement that a bear market isn’t just around the corner, “history again may offer some more virtual Valium,” reminded Stovall. Should the S&P 500 again rise at the end of February as it did last year, “it will trigger a favorable indicator,” he added.
“In the 27 years since 1945 that the S&P 500 rose in both January and February, the index recorded a positive full-year total return 27 times, averaging a gain of 24 percent,” Stovall noted. And it stayed up in the remaining 10 months 25 of 27 times. That’s partly why Stovall thinks the market at this point continues to provide good opportunities.
Wall Street’s performance in the first two months of the year may offer a clue that investors believe “good things still lie ahead,” suggested Stovall. “So should the S&P 500 finally reset its dials -- we think it ultimately will -- we recommend that investors consider buying rather than bailing.”
That bullish advice suggests that this eight-year old bull market has the stamina to continue galloping ahead, possibly helped by the “animal spirits” unleashed after the presidential election.
Looking back, the current bull market has withstood numerous stresses, noted Michael Arone, chief investment strategist at State Street Global Advisors. He includes the debt crisis in Europe, terrorist attacks around the world, the surprise Brexit vote, continued slow growth in the U.S. and the exceptionally divisive American presidential election. And now, with the Dow hovering above 20,000, the crucial question for investors, according to Arone, is whether the bull market will end soon, or will it become the longest ever?
Arone contended that “history and valuations don’t appear to be on the side of a long continuation of the bull.” But based on past history, he argued, “the bull market could continue to run for at least another year and a half.” He emphasized that “very few signposts indicate we may be approaching a market top.”
Arone said there are three important signs to look out for that would indicate a market top: an increase in volatility and frequency of market corrections, rising real interest rates and widening credit spreads. “I don’t think any of these three signals are currently flashing red or even yellow,” he said. So the bull market “may have a ways to go, but these signals require careful and constant monitoring,” Arone stressed.
According to CFRA Research, 2016 fourth-quarter earnings of companies comprising the S&P 500 index are projected to have risen 5.8 percent year-over-year versus the analysts’ 4.2 percent estimate. And aggregate estimates compiled by S&P Capital IQ point to a new earnings per share record for the first quarter of 2017.
Nine of the 11 sectors in the S&P 500 posted monthly advances, led by a 5 percent gain by the financials, health care and technology. Only the energy and telecom groups were in the red. CFRA recommends just two stock groups as “overweight”: the industrials and materials sectors. Tagged as “underweight” are consumer staples, energy, real estate and utilities.
For opportunistic investors, it may not be too late to catch the market’s upside momentum. Here’s one courageous way to look at the market if it should pull back after its big run: That would be another opportunity to buy bargains among fundamentally sound stocks or exchange-traded funds.
