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Why some Wall Street pros are thrilled about the selloff

Dion Rabouin

Some investors couldn’t have been more excited watching the Dow fall by 1,175 points, the most in its history, on Monday.

Managers have complained for years that U.S. stocks were expensive, with market watchers routinely calling them overvalued. This stock market selloff that has offered a bit of respite to those weary of the market’s lofty price to earnings ratios and providing what they call a buying opportunity.

Kate Warne, who back in January when the market rally was frothing said investors ought to hold more cash, now says it could be a good time to pick up stocks on the cheap.

“This looks like a return to normal market volatility, and it suggests investors are moving toward a more balanced view of market risks and returns,” she told Yahoo Finance via email. “Although it could continue, we think investors should consider buying the dip, especially if they need to add equities to their portfolios.”

Most exciting to investors is that the selloff comes as U.S. economic fundamentals are almost unequivocally positive. Friday’s 666-point slump for the Dow followed a U.S. payrolls report that showed 200,000 new jobs were added and wages were growing at 2.9% on an annual basis, the largest wage bump since 2009. On Monday, the Institute for Supply Management reported that its gauge of non-manufacturing industry growth had beaten estimates. The service sector has now seen continued expansion for eight consecutive years.

We see the market selloff entirely disconnected from fundamentals,” JP Morgan’s U.S. equities analysts wrote in a note to clients. “While the sharp rise in volatility may contribute to further outflows from systematic strategies in the short-term, we believe fundamentals should ultimately prevail.”

A screen shows CNBC’s analysis of the Dow Jones Industrial Average during a sell off on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., February 5, 2018. REUTERS/Brendan McDermid
A screen shows CNBC’s analysis of the Dow Jones Industrial Average during a sell off on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., February 5, 2018. REUTERS/Brendan McDermid

The analysts also highlighted that American companies have continued to post double-digit earnings growth, the expected boost from U.S. tax reform and global synchronized growth as well as a weaker dollar as backing a return to stock gains.

“Investors should be reassured in coming days and weeks by the strength of company profits, and the dividends and share buybacks which high levels of company cash allow,” said Aberdeen Standard Investments Head of Global Strategy Andrew Milligan in an email. “Inflation is likely to edge higher in coming months, but not surge dramatically.”

Largely, fund managers agreed that the risk of a recession is low, meaning stocks will turn around and move higher.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, argued that declines like the one the market experienced Monday more often than not have led to investor profits.

“While the sharp decline in the S&P 500 on Monday was unnerving, it is important to keep in mind that these kinds of moves have tended to be buying opportunities in the post Financial Crisis era,” Calvasina said in a note to clients, noting that their research shows 15 one-day drops of 3% or more in the S&P 500 since 2010. (Monday’s fall was more than 4% for the Dow, Nasdaq and S&P.)

“These drops have often occurred in the context of choppy equity market conditions in the short term,” she said. “But six months later, the index has been meaningfully higher the vast majority of the time, with a median gain of 12%.”

JP Morgan’s equity team made their recommendation plain: “We recommend investors buy the dip and start averaging in at current level,” they concluded.

Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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