Whatever doesn’t kill this bull market may only make it stronger.
That’s the view of Charles Schwab analysts, who argued that investors should be welcoming the volatility that’s made a dramatic reappearance in the U.S. stock market over the past two months.
Recent turbulence gave major indexes their first correction in about two years — the Dow Jones Industrial Average DJIA, -1.90% and the S&P 500 SPX, -2.23% in February, the Nasdaq Composite Index COMP, -2.74% on Monday — as well as contributing to some of the biggest one-day swings in both directions in years. However, rather than such gyrations signalling the end of the multiyear bull market, this could actually be putting equities on a stronger footing.
While the current environment is much scarier than 2017 — an atypically quiet year, where Wall Street rose with basically no pullbacks and record-low volatility — “ironically, this is probably a healthier investing environment which could help keep the bull market alive,” wrote the team of analysts, including Liz Ann Sonders, Schwab’s chief investment strategist.
“Valuations, which were quite extended as we entered 2018 have had the chance to retreat somewhat — courtesy of both the correction in prices, but also the strength in earnings. Additionally, sentiment conditions... had gotten to record optimistic levels, but have now corrected back to the neutral level.”
Volatility returned to markets so swiftly this year that it was “like flipping a switch,” Schwab wrote.
The first catalyst was a report that showed wages growing at their fastest pace in years. That spurred concerns that inflation, long dormant in the markets, could be returning and that the Federal Reserve might have to become more aggressive in raising interest rates to combat that environment. Subsequent shocks came on the back of President Donald Trump unexpectedly announcing tariffs and other proposed changes to trade policy, as well as sharp weakness in the technology and internet sectors, which weighed on equities broadly.
The volatility has come in both directions, and big upward moves have been seen on signs that trade may not represent the headwind some investors fear or that the move in tech has been overdone.
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Market bulls have plenty of factors they can marshall in their favor, including a strong labor market and quarterly earnings that are poised to grow at their fastest pace in years. Those factors remain in place despite the pullback, which some analysts said was overdone given the valuations indexes had rallied to, and the length of time that had passed since the previous correction, which are historically quite common.
“This probably isn’t the start of a bear market, but it doesn’t ’feel’ like a bull market right now — it’s more of a ‘bunny market,’ as the jittery stock market hops up and down,” Schwab wrote.
“While unnerving at times, we continue to believe the economic and earnings environment should support a continuation of the bull market, albeit with more volatility, some elevated risks, and ‘bunny-like’ behavior in the near term.”
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