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Presidents get to deliver State of the Union addresses. But analysts like me have to settle for a bit less. With that in mind, consider this my “State of the Market” issue.
Let’s start with a few key questions: Are we seeing irrational exuberance? Are we in a euphoric market where you have to start selling your stocks to new buyers before they crash? Are we seeing excessive trading, and investors acting on a belief that markets will never go down again?
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My take: “No.” While investors are complacent, they certainly don’t seem euphoric. Last week, we even had one talking head after another coming on TV and calling for a top in the market. That’s not the kind of thing you hear when the bulls are firmly in charge.
Meanwhile, every time we get a dip in the market, it seems to get bought quickly. That persistence of momentum is another indicator of a healthy bull run. While markets are known for having 10% drawdowns every 18 months or so, the market only fell 1.1% before turning back around. And here we are again, close to record highs.
The bears will complain about high valuations, and there is some truth to that. But S&P 500 earnings growth is living up to relatively high expectations. This quarter, we’re looking at 7% growth, and next quarter could be similar.
As for the economy, the Federal Reserve Bank of Atlanta’s GDPNow Model projects fourth quarter growth of 3.4%. That’s quite good for a large, mature economy – and it would be the best fourth quarter we’ve seen since 2013.
Finally, there’s the high-yield, or “junk”, bond market. A sell off there contributed to market jitters last week. But it too has regained its footing – neutralizing another bearish argument.
Long story short, the sell off last week was less a case of a market top, and more so regular equity market volatility. With underlying fundamentals this good, and interest rates still so low, it’s important that you train yourself to use events like the recent pullback as buying opportunities. The lists I’ve been giving you of retailers, high-tax-burden stocks, and others should help you with idea generation and narrowing your search for new buys.
Best wishes,
Mandeep
Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio. |
