Thanks to the heavy selling and high volatility in the market in recent
weeks, many stocks are once again in the bargain box. Which means the shares of
many companies are literally “on sale.”
That underscores the
point some market analysts are saying — that this is not the time to head for
the doors since the stock market is far from overvalued. They argue that since
there are no signs that a recession is within sight, a large selloff isn’t
likely to develop. In fact, "stocks are now undervalued, and could rally
by the end of the year,” argues investment strategist Hugh Johnson.
“It doesn’t take much
for edgy investors who have made big profits to get off the fence and sell,” he
argues. "The recent market sell-off is a correction, driven by
investors who think ”this is one heck of a long recovery.” Investors have taken
an overly pessimistic view of a coming slowdown, so I expect the S&P to
close this year higher than current levels as stocks have now become
undervalued,” asserts Johnson.
"The
U.S. economy is strong, with leading indicators - indicators that tell us where
we are going, not where we have been — rising for 28 successive months,”
Johnson adds. Moreover, he anticipates the index will post an increase in
October when it’s released in November. Moreover, the 91–day U.S. Treasury
bill/10–year U.S. Treasury note yield curve and consensus forecasts for the
economy and earnings for 2019 and 2020 suggest that the market sell-off should
not be attributed to a recession, Johnson says. “The weight of the evidence is
telling forecasters not to get into the recession camp,” he adds.
“This is not the
end of a cycle and it's not the start of a bear market that’s going to be
accompanied a recession,” argues Johnson.
Sam Stovall, chief
market investment strategist at CFRA, points out that part of investor
pessimism is being driven by fear that a big crash reminiscent of the “Great
Crash of 1987.” But he doesn’t believe the market is headed for a repeat of
1987. While the current pullback "will likely challenge our bull-market
belief for the time being, we don’t think we are headed for a repeat of 1987,”
emphasizes Stovall. “So some investors might consider rotating rather than
retreating,” he advises.
Using
the S&P 1500 sub-industry relative strength rankings as a guide,
"investors might consider adding selected consumer, health care and
technology names, to their portfolios,” Stovall suggests. The current negative
“noise,” he adds, shouldn’t cause most investors to believe that another crash
is around the corner. Even though the S&P 500 is currently off 5.5% from
its Sept.20, 2018 peak, the S&P 500 had declined by more than 16% through
Friday (10/16/87), notes Stovall.
"In
addition, when comparing today’s fundamental foundations with those from 1987,
one will quickly conclude that there are few similarities between then
and now,” argues Stovall. “Today, while GDP growth is comparable, the
year-on-year advance in the second quarter (as reported) earnings-per-share is
three times as great as it was in the third quarter of 1987.”
What’s
more, he notes, inflation was twice as high back then at 4.3% as compared to
today’ 2.2% as of its most recent reading. Also, the 10-year yield
averaged 9.4% on September 1987 versus today’s 3.2% level, and the Federal
Funds rate was 500 basis points higher back then at 7.25%, as compared with
today’s 2.00%-2.25% target range, notes Stovall.
Nonetheless,
the tug-of-war between the bulls and the bears continues. Indeed, October
historically has been one of the most volatile periods of the
year.
But
notwithstanding the recent market volatility, in part because of
renewed fears about the prospects for t,he economy, Ed Yardeni, president
and chief investment strategist at Yardeni Research, notes that both the
Index of Leading Coincident Indicators (CEI) and Index
of Leading Economic Indicators have risen to record highs in September.
One problem
is that investors are confused by the conflicting fiscal and
monetary policies and the mixed third-quarter earnings reports. Yardeni
points out that the Federal Reserve Board’s “confidence in
the economic is spooking investors, who now fear that "a
3.40% Fed Fund’s rate is more likely in 2020.”
But
Yardeni describes the economy as “running hard, not hot,” as he notes
that the U.S. economy continues to grow at a solid pace without
reviving inflationary pressures. So the Goldilocks growth trend
continues, particularly on a year-to-year basis, according to
Yardeni. He sees no recession with both the CEI and Index
of Leading Economic Indicators at record highs.
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