The Coronavirus outbreak appears to have stalled the stock market rally that gave us spectacular gains last year, and pushed the major indexes to all-time record highs just a couple of weeks back.
Market bulls see the current tentativeness as nothing more than a temporary breather that will allow investors to take stock of the problem before resuming its upward surge. And with many calling this the greatest economy of our lifetime, the bulls have a compelling case.
The other side is less sanguine about what’s happening in the market and sees this as the catalyst that will result in a long-overdue market downturn.
These contrasting views beg the question of where we go from here. And that’s my goal in this piece - to survey the landscape of bullish and bearish arguments to help you make up your own mind.
Let's talk about the Bull case first.
1) Improving Economic Outlook: The U.S. GDP growth has remained in the +2%-plus range over the last few quarters despite trade-centric uncertainties weighing on the factory sector. There is nothing in current data that would suggest growth falling below that level over the coming quarters. In fact, economic growth should improve with the easing of trade issues following the historic signing of phase one of the U.S.-China trade deal, and the USMCA trade deal. Moreover, global purchasing manager surveys indicate that the outlook for Europe and Asia has also started improving lately, notwithstanding the expected temporary setback to the Chinese economy as a result of the Coronavirus.
2) Earnings Growth Resumes: Earnings growth was anemic in 2019 primarily because of the tough comparisons to the all-time record corporate profits the year before that were boosted by the tax cut legislation. Although, stocks soared nonetheless. But growth is set to resume in the first quarter of 2020 and is on track to accelerate in the back half of the year and beyond. In fact, our real-time analysis of the incoming Q4 earnings results shows that estimates for 2020 Q1 are starting to go up. If confirmed through the remainder of this ongoing earnings season, this favorable revisions trend will be a major upgrade in the overall earnings picture. This tells us that the market’s impressive gains last year correctly anticipated the earnings turnaround, with the improvement in earnings outlook providing a fundamental justification for still further market gains.
3) Favorable Monetary Policy: The Fed left interest rates unchanged this week and will likely remain on the sidelines for now, after cutting rates three times last year to shield the economy from negative global influences. The overall monetary policy stance across all the major economies, including the U.S., remains favorable and supportive of the market. What this means is that even though the Fed isn’t cutting rates currently, it will continue to keep interest rates and overall financial conditions supportive of stocks for the foreseeable future.
More . . .
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Let's see what the Bears have to say in response.
1) Market Complacency about China & Elsewhere: Market prices reflect consensus expectations, and current consensus expectations for GDP and earnings growth are clearly on the optimistic side. China’s economy was losing steam already and the impact of the virus outbreak will only add to its woes. The best-case scenario for China is the resumption of ‘normal’ economic growth after a short-lived downturn, along the lines of what the country experienced after the SARS epidemic. The rest of the so-called BRICs appear to have hit a wall as well, which is having knock-on effects all over the world. Although, it should be noted that the impact of SARS on the U.S. markets back then was mild. And stocks recovered quickly.
2) Economic & Earnings Picture Isn’t Perfect: The U.S. economy is no doubt doing better relative to the rest of the world. Housing and the labor market are doing great with housing starts experiencing their biggest increase in 13 years, and unemployment at 50-year lows. But the factory sector has been struggling for a while. On the earnings front, some are viewing the optimistic consensus estimates for this year and next with a dose of skepticism. And they dismiss the market bulls who cite the fear-of-missing-out (FOMO) and there-is-no-alternative (TINA) as explanations for the rally.
3) The Market’s Fed Addiction: The market forced the Fed to reverse its tightening cycle by throwing a tantrum in the last quarter of 2018. The resultant rebound that ushered in 2019 gained momentum with each of the Fed’s three rate cuts throughout the year. The central bank currently remains in a wait-and-see mode as this week’s meeting showed, with its quest for monetary policy ‘normalization’ effectively forgotten. With the economic cycle getting long in the tooth, the Fed has to be mindful of its limited firepower to fight off an eventual downturn, whenever that may be.
Where Do I Stand?
I don’t dismiss the bearish arguments entirely, but I don’t see them adding up to an end of the rally. The reality is that it isn’t FOMO or TINA, but rather hard fundamental logic that argues for continued momentum in this market. Underpinning this logic is the U.S. corporate and household sectors in strong financial health, unlike in past cycles when they would be over-extended by now.
The logic of economics dictates that this cycle, the longest in the nation’s history, will eventually come to an end. But economic cycles don’t die of age; they die from overheating or Fed missteps. Fortunately, inflation is subdued, and the Fed is on pause.
These are historic times for the economy and the market.
And historic times create historic opportunity.
All in all, this is the best time to be fully invested in the market, particularly if you are investing for the long haul.
And I would definitely be a buyer on any dip because it looks like there’s a lot more upside to go.
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Stock #2 - Surging Retailer That Seems "Amazon-Proof"
While traditional retailers have, in some cases, suffered from stiff online competition, the best-run retail companies are absolutely thriving. This specialty retailer has seen significant sales increases and just raised guidance for 2020.
Stock #3 - Pullback Makes Perfect Buying Opportunity
Direct-to-consumer medical company has experienced almost unprecedented growth over the past 2 years. With a recent dip in share value, analysts across the board are calling this a Buy, with price targets 150% higher than it currently stands.
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Thanks and good trading,
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access Zacks Investor Collection.
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