Market Pulse: Good … and getting better
For two months stocks had advanced, fueled in part by a sense that a better trade deal with China is fast approaching.
But you can’t keep rallying for the same reason, and stocks finally dipped this week. I’m sure that the trade deal will be one where both sides will gain something. That’s called bargaining. No one ever gets all they want.
The market’s relentless two-month rally portends well for the rest of the year. How well? Better than you think.
There have been 30 years in which the market rose in both January and February, this now being the 31st. In 29 of the 30, stocks were positive for the year. Average gain: 20 percent. If past is prologue, as they say, there are better days ahead.
Why the enthusiasm?
First, the December sell-off was overdone and unrelated to realistic expectations for earnings. Typical profit-taking in a bull market was condensed into a few weeks, much faster than usual amid volatility seldom if ever seen. Bargains appeared.
Hedge funds and bull-market doubters, who were grossly underinvested in stocks last year and before, needed to get onboard or risk losing their jobs, clients or businesses.
They started to buy a day after Christmas and they’re still buying stocks, the only vehicles for investors seeking capital appreciation and some income (bonds offer little competition). Private equity firms alone have an estimated $2.5 trillion to invest.
There are trillions available in mutual and pension funds, individual accounts and overseas. This has been what some call a “buying panic.”
There are potential negatives that could undermine the bull market, though I do not believe any actually will do so soon. Today’s potential negatives include high and rising debt levels here and abroad, budget and trade deficits, any number of possibilities in Washington, flash crashes leading to financial panic, etc.
The possible negatives are well-known and widely discussed on financial channels. Lesser mentioned is that the outlook for interest rates and earnings — the keys to future stock prices — is solid.
The rate outlook, often a headwind for the market, is benign and will remain so, as Fed chief Powell reiterated last week. Earnings will grow, albeit at a slower rate than we saw last year. Those and other positives are seldom mentioned, but investors understand.
Put all this together, add in a healthy and needed dose of skepticism, and you have a recipe for a bull market. And so it goes.
David Vomund is an Incline Village-based fee-only money manager. 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.