Stocks may slip but won’t kill the bull
Can the record-breaking stock market keep going up, or is it setting up for a big fall that will take a slice out of your 401(k) savings?
While Wall Street pros won’t rule out a drop of 3% or 5%, they are not calling for a collapse. The reasons? The traditional pillars of a rising market — strong earnings and growing economies around the globe — remain intact.
Just because the Dow has notched
54 record highs this year and is up nearly 19% doesn’t mean stocks are in danger of plunging like they did in
2000, when the Internet stock bubble burst, or 2008-09, when the market lost more than half its value in the Great Recession.
No typical signs of trouble
While investors might be guilty of pricing in too rosy an economic scenario — and are betting on an added boost from hoped-for tax cuts from the Trump administration — the conditions that would cause a replay of past market meltdowns aren’t in place.
There are no signs of recession. The mood of investors isn’t nearly as euphoric as 2000. A big spike in interest rates isn’t expected despite moves to reduce stimulus in the financial system. And foreign economies in places like Europe are no longer in crisis.
What’s more, while the the S&P 500 stock index is trading at 18.2 times its projected earnings over the next four quarters, it’s not nearly as frothy as the peak P-E of almost 30 back in 2000 during the tech-stock boom, according to earnings-tracker Thomson Reuters.
Brian Belski, chief market strategist at BMO Capital Markets in New York, says stocks will eventually suffer a setback, but not one big enough to cause a lethal blow.
“Nobody knows when a correction is coming, but it is coming,” says Belski, a long-term bull. But, for now, “it is difficult to be bearish.”
Stocks have more room to run
Tony Dwyer, chief market strategist at Canaccord Genuity in New York, says investors need to make a distinction between “a peak and the peak.”
Dwyer is sticking to his 2018 year-end target of 2,800 for the S&P 500 stock index — which is 8.5% higher than Friday’s close of 2581.
He believes any drop will be brief and that stocks will rebound and make even higher highs. The market, he says, will be driven higher by stronger economic activity, higher corporate profits and the potential for tax cuts. That upbeat the-
sis was bolstered Friday when the government reported that third-quarter GDP came in at 3%, the first time the economy has posted two straight quarters of 3% growth in three years.
“We are years away from the peak,” says Dwyer.
Skeptics say that market risks are building
But that doesn’t mean risks are not building as the market climbs to fresh records.
There are early signs that the continued rise in stock prices is causing bets on stocks to increase. Wall Street pros are getting more bullish and money managers are drawing down cash levels and buying more stocks, says Jill Carey Hall, U.S. equity strategist at New York-based Bank of America Merrill Lynch.
Global fund managers’ cash levels have fallen to 4.7% of total assets, the lowest level since May 2015, according to BofA data. Wall Street strategists have been increasing their recommended portfolio weightings of stocks. Currently, they’re advising clients to put 55.4% of their money in stocks, near the highest level since 2011
Hall sees more “downside” risk than “upside” risk in the final two months of 2017. The market, she warns, could suffer tumult from uncertainty over the president’s tax-cut plan, an escalation of geopolitical issues, as well as worries that earnings expectations might be too high. Analysts are forecasting U.S. profit growth of 11.3% this year and 11.4% next year, Thomson Reuters data show.
While rising interest rates resulting from a strong economy aren’t reason for alarm, stocks could “pull back a bit” if the spike in bond yields continues on a sustained basis and is quicker than expected, she adds. The Federal Reserve is expected to boost its key short-term rate for a third time this year in December.
“If economic data got worse and the Fed got more aggressive and we got disappointment on tax reform, if all that happens in combination, then it would not be unreasonable to expect a bigger rollback in stock prices,” Hall says.