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“Recent market volatility has put the longevity of the bull market in question," said James Demmert, founder and managing partner at Main Street Research in San Francisco. ‘After 18 months of low-volatility markets, things became much more volatile in the middle of January, starting with a 10 percent slide within just weeks. Now two months later stock indexes have still been unable to recover.’
Sustainable market growth seems to be just out of reach of investors, which adds to market jitters.
“Each time stock indexes appear to be gaining strength for a number of days, these attempts have failed to be prolonged and stocks continue to fall closer to the lows of January,” Demmert said.
Even so, investors should be careful about becoming too bearish at this point, he noted.
“First of all, throughout the history of bull markets, 8-to-10 percent corrections are normal occurrences as markets have powered higher over the past several years,” he said. “Though the recent correction in January happened very rapidly, it still remains in the confines of a normal correction.”
More importantly the financial data points for the continuation of the bull market continue to be supportive. Demmert cites the following points:
Price-to-Earnings Ratios. “For example, the current P/E ratio of both U.S. and global stock indexes is about 16.5, which is not indicative of an oncoming bear market. In fact, it suggests that stocks are reasonably priced, if not a value, at this point,” Demmert said.
Economic Growth. Economic growth both domestically and globally is stronger than it has been in more than a decade, he added.
“The U.S. economy is chugging along at 3 percent and global growth is at 3.6 percent,” Demmert said. “This type of economic momentum is not what one would see at stock market tops or the beginning of bear markets.”
Corporate Profits. “We are witnessing a period of significant corporate profit earnings - the ‘E’ of PE ratios,” Demmert said. “This type of growth is what drives bull markets higher and is not the type of environment one would see at the beginning of a bear market.”
Investor Psychology. According to investor intelligence, polls state most investors are quite bearish or indicate the market will decline.
“These polls serve as a great contrary indicator and suggest that markets will probably continue higher,” Demmert said. “When these polls show an overwhelming amount of optimism amongst retail and institutional investors markets typically are at their peak. But that’s not so today.”
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at brian.oconnell@innfeedback.com.
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