Market Pulse: Climbing the wall of worry
The recent market sell-off has some people rattled. They shouldn’t be. Periods of profit-taking are common in bull markets and serve a purpose when prices rise too far, too fast, as some have. Tech stocks are Exhibit A.
Since the March 23 low, a handful of large companies have led the rally while most stocks did little. You know the names — Apple, Facebook, Tesla, Google, Netflix and a few others. Because so many traders had focused on that group and driven them to levels unrelated to growth prospects those stocks were the most vulnerable to profit-taking. Tech stocks have come under pressure before only to snap back, and it’s a good bet they will again. There are legions of individual and institutional investors who just want to own them.
Some say that a bull market “climbs a wall of worry” and this one certainly has done that. There is the virus, the economy, the job market, global growth, earnings, devastated small businesses, the election, violence in the streets, trade frictions and maybe inflation. All are valid concerns for which there could be either a positive or negative resolution.
But is the glass half full or half empty? I am in the half full camp and have been for many years. Why? Because favorable resolutions to the obvious concerns and problems of the day are in everyone’s interest. Why assume the worst outcome when all forces are lined up against it and there is no constituency for failure?
The stock market’s surge since the March low has been led by a handful of companies that have not been significantly impacted by the recession or the virus. Those companies are not a major part of the economy, so their rise did not reflect a growing optimism that there are better days ahead. Such optimism would be reflected in cyclical and so-called value stocks (industrials, financials, energy companies, retailers, etc.).
We are seeing some strength in value stocks and cyclicals (Home Depot, Walmart and others), but not much. They will have their day. They always do.
The bull market will rumble on. Low interest rates, a lack of attractive alternatives to stocks and a massive amount of available cash will remain the key drivers. Then the prospects for earnings growth next year will take over and more money will be put to work. Those who only see a half-empty glass will miss out again. Will they never learn?
David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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