Market Pulse: The bullish case
September 27, 2018
Some investors see daily moves of hundreds of points in the Dow Industrials and say that the market is just too volatile for them, they want no part of it. Wrong.
Volatility is actually low. In fact, there hasn't been even a modest 11-percent decline since February 2016. Why is volatility low? Why are stocks rising? Readers of this column know full well. The economy is strong and earnings are up. End of story.
The economic numbers and the outlook continue to be solid, in fact better than three or six months ago. The employment picture is especially strong, as we saw again in last month's report and ADP's words ("incredibly dynamic").
Factories are humming, people are spending. The Atlanta Fed, which takes the lead in GDP forecasting, now expects the third quarter's annualized growth to be 4.7 percent, even better than the second quarter's 4.2 percent.
Investors have reason to be more upbeat as well because the market set all-time highs in August, historically the market's second-weakest month. September is historically the worst month, but the market isn't spooked.
Instead of selling, there is a rotation from growth issues to more conservative dividend-paying value stocks.
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Some say stocks are overvalued. I disagree. Relative to this year's S&P operating earnings (est. $170-175) and more important to next year's (est. $190), stock valuations are in line with or slightly below historical averages.
However, as you've read here, these are not average times by any measure.
Faithful readers of this column know full well the reasons the economy is strong: corporate revenue and profits are up and money is flowing in from overseas. The Fed knows that, too, which is why a rate boost this month is baked in the cake. Another increase in December also is likely.
Not to worry. Rate increases to still-low levels will not end the bull market. Extreme valuations would, but as I said stocks are not at all overvalued relative to earnings prospects and the interest-rate environment, which will be benign.
Of course, other factors unrelated to valuations and interest rates could cause volatility and even flash crashes similar or worse than those we saw in recent years. Maybe something on the trade front, though I doubt it.
Those who have been waiting to buy on a significant pullback have been waiting for a long time. Why? It's a bull market.
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.