After months of cryptic warnings that a market correction was imminent, the long overdue pullback finally arrived. The S&P 500 fell almost 100 points, or 5.8%, from its all-time high on May 21. It was the first 5% market correction in over 200 days.
Just as it looked like stocks might be in the dumps for a while, a funny thing happened. Last week the markets recovered. The S&P is up 3.3% in the last five trading sessions, reclaiming most of the losses suffered during its month-long mini-slump.
So has the pullback come and gone in just a month?
Here are five reasons to believe the market correction is over:
- Investor Fear is Dissipating. Two weeks ago, the CBOE Volatility Index (VIX) – a.k.a. the investor fear gauge – topped 20 for the first time all year. The VIX had been rising steadily for more than a month, advancing 64% from May 17 to June 20. Talks of the Federal Reserve “tapering” its $85 billion-a-month bond buying fueled investor fear, peaking in the days after Ben Bernanke’s recent confirmation that the Fed does indeed plan to put an end to QE3 sometime in the next year. In the last week, however, that fear disappeared – perhaps because investors are coming to terms with the idea that less money printing is actually a GOOD thing. In just five days, the VIX fell 20%. That’s a trend in the right direction.
- U.S. Stocks Remain Cheap. Second-quarter earnings season begins next week. As of now, however, U.S. stocks are trading at an average of 15 times what companies have earned in the past year. That’s below the median 16.1 price-to-earnings ratio of the past decade. Comparatively, stocks are still cheap – even as they approach record highs again.
- History Says So. According to the Stock Trader’s Almanac, July is the best month for stocks in post-election years. Since 1950, the S&P 500 and the Dow Jones Industrial have risen by an average of 2% in the year after we elected a president. The Nasdaq has performed even better, advancing an average of 3.1%. There’s another positive historical trend working in the market’s favor this year. When stocks rise in January and February, as they did this year, the S&P posts an average full-year return of 24%. That would be another 10% rise from today’s prices.
- The Apple Factor. Most stocks have thrived this year. Apple (AAPL) has not been one of them. Shares of the world’s largest company have been mired in a nine-month slump, falling 41% since last September. During that time, the S&P 500 has advanced 10% and the Nasdaq is up 7%. Not too long ago Apple essentially was the market. When it rose, so did other stocks. Lately, however, the market has risen in spite of Apple – not because of it. Despite its recent struggles, Apple remains large enough to have major influence over the market. If Apple ever gets out of its current rut, that is likely to give the market another boost.
- QE3 Isn’t Over Yet. Bernanke said it himself: QE3 isn’t ending anytime soon. It could be another year until the Fed pulls the plug on its stimulus program. Until then, let the good times roll. Stocks tend to rise during periods of quantitative easing. During QE1, the S&P returned 37.3% in 16 months. In QE2, the index gained 10.2% in eight months. Since QE3 was announced last September, stocks have risen 10% in less than 10 months. With another 10 months – or more – remaining until QE3 disappears, it’s reasonable to expect stocks will keep rising.
The summer can be a slow period for the market. But there is compelling evidence that investors will continue to favor stocks over bonds.
With stocks up considerably in 2013, the rapid rise for the market may slow down a bit. But even so, stocks are attractively priced, offer attractive yields, and are positioned for profits in the coming six months.
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