Look at strong earnings, a strong IPO market, a lack of alternatives — plus you knew 2018 would be tougher than 2017
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It’s hard to sugarcoat the stock market’s performance in March. It was undeniably a bad month for investors — and already we’ve seen signs that April may bring continued fireworks.
However, after a roughly 6% decline for the S&P 500 (^GSPC) from highs in late February, most folks have been acting like all hell has broken lose.
Believe it or not, markets have shown a measure of resiliency in March and April, with the 2018 lows for the S&P set on Feb. 8 still holding as the support level. This, despite all the talk in recent days of an escalating global trade war or U.S. engagement in the literal war raging in Syria. That’s no mean feat.
Furthermore, if you look beyond the last few weeks, stocks have done quite well; the S&P is up about 11% in the last 12 months.
Yes, there are reasons for concern right now. And though you may have forgotten after a roaring 2017, there are always serious risks when investing in the stock market, and equities never move up in a straight line for long.
However, there are still some pretty compelling reasons to stick with stocks right now. Here are some.
Awesome earnings: Let’s start with the simple fact that stocks are enjoying an earnings renaissance. According to financial data firm FactSet, first-quarter earnings growth should top 17% to mark the fastest rate of expansion since the first quarter of 2011. Furthermore, on Dec. 31 the forecast was for just 11% growth — meaning the outlook for corporate profits are looking even better despite the uncertainty of the last three months.
Read:Hopes are high for this earnings season—and that could prove dangerous
Consumer confidence: After big tax cuts at the end of 2017 created optimism, the Conference Board reported that consumer confidence hit an 18-year high in February. Sure, the number softened up a little in March, but let’s not get hysterical about any short-term slip. Or in the words of the Conference Board: “Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.”
Read:Howard Gold says in this Goldilocks economy, you’ll want to own stocks
VIX not noteworthy: The CBOE Volatility Index (^VIX) (VIX) spiked over 80 twice, and over 70 six times in 2008. “Yes, theoretically the VIX hit its highest level since 2015 with a very short-lived spike to 50 in early February when the Dow Jones Industrial Average(^DJI) saw two 1,000-point declines in the same week. But it has faded into a slightly elevated but rather unimpressive level between around 15 and 25 ever since. A long-term look at the VIX shows plenty of periods where volatility “spikes” to these levels — if it can be called a spike — that didn’t upend the bull market. So let’s not consider any brief pop in the fear index as a guaranteed death knell for the markets.
Fed expectations are clear: The Federal Reserve has done an impeccable job speaking consistently about the course of action and playing the expectations game to perfection. Consider that the market was completely unsurprised by the March rate increase and the CME’s FedWatch putting the probability of no action at its May 2 meeting at 98%. This is remarkable synergy between investors and the Fed, and as long as everyone is on the same page there’s no reason to expect any fireworks. After all, ultimately a shift toward higher interest rates borne out of full employment and robust growth prospects is a good thing, because it speaks to a normalized and fully functioning U.S. economy.
IPOs and acquisitions abound: The successful IPO of streaming radio firm Spotify (SPOT) and the March offering from data storage firm Dropbox(DBX) shows that multibillion tech players aren’t afraid to enter the public markets at this time. M&A is also running hot in 2018, with a record-breaking first quarter thanks to a smattering of big-ticket health-care deals like Celgene (CELG) acquiring Juno Therapeutics for $9 billion in January and (SNY) (SAN.PA) buying Bioverativ for almost $12 billion. If this were truly a doomed market, we would see this kind of investment activity slowing down — and it hasn’t.
What’s your alternative?: With the interest-rate risks that come with normalization of Fed policy, it’s awfully difficult to imagine moving your money into bond funds. Just look at the iShares 20+ Year Treasury Bond ETF (TLT), which has dropped nearly 4% year-to-date as rates have risen, to underperform the stock market. Worse, the yield gap between a 10-year Treasury note(XTUP:TMUBMUSD10Y=X) and the 2-year Treasury(XTUP:TMUBMUSD02Y=X)fell under 50 basis points to start this week (2.78% versus 2.29%). That’s not much of a risk premium to tie up your money for an extra eight years. Unless you want to completely throw in the towel, hiding in the paltry yield of short-term bonds or the security of cash, U.S. stocks are still the best game in town.
This pullback was utterly expected: Say what you want about the last three months, but “irrational exuberance” doesn’t feel like an accurate description. Pundits have been ringing alarm bells since January. And honestly, if you sat down over a beer with any logical investor on New Year’s Eve and asked to expect in 2018, almost every one of them would have said “We had a great year thanks to the Trump Bump, but it’s going to be much tougher in 2018.” Sounds about right, doesn’t it? So perhaps instead of panicking about modest market declines, we should simply sit tight before making rash decisions about the end of this bull market.
Now read:The surprising reason stock-market investors on higher floors take more risks
Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter @JeffReevesIP.
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