Fear has been creeping back into the financial markets... Some of the talking heads on TV are warning of a market crash. Others say we're in a "bubble of all bubbles."
Here's Why It Pays to Stay Long in This Market
By Vic Lederman, editorial director, Chaikin Analytics
Fear has been creeping back into the financial markets...
Some of the talking heads on TV are warning of a market crash. Others say we're in a "bubble of all bubbles."
It's easy to see where they're coming from.
As measured by the S&P 500 Index, the market traded at a forward price-to-earnings (P/E) ratio of more than 20 times going into July.
The eight largest companies by market capitalization were far more expensive. Their average forward P/E ratio was more than 30 times.
Put simply, the market has been looking expensive...
And since hitting a record high on July 16, the S&P 500 got a reality check.
By July 25, the index was off almost 5% from its peak. In dollar terms, nearly $3 trillion in market capitalization evaporated.
A drop like that is enough to raise eyebrows. Put it beside headlines warning of a crash, and it's no surprise that investors are scared.
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Overall, the U.S. market has been on a great run in 2024. In fact, before the recent declines, the S&P 500 was up nearly 19% year to date.
That already beats the long-term average return for the index by almost a factor of two. Those gains also happened in half the time.
Twice the gains in half the time... Let that sink in for a moment.
Folks, nothing goes up in a straight line forever. Pullbacks happen – even in a bull market.
This market was bound to take a breather. It's also not the first time it happened this year.
In April, the S&P 500 fell 5% from its peak. But once the decline was over, stocks rallied 14% over the next three months.
Looking back a bit farther, a correction between August and October last year ended in a roughly 10% drawdown. The following rally up until this April's pullback delivered a nearly 28% gain.
Again, pullbacks happen all the time. We're going through one right now.
While I can't say exactly when this current one will end, I'm confident about one thing...
We're still in a bull market.
It's about 21 months old and has delivered a 52% gain so far.
Even better, we're still in the middle innings as far as the average bull market goes...
Since 1928, there have been 24 bull markets, not including the one we're in right now.
These bull markets have averaged 1,102 days between trough to peak. That's about three years.
The longest of these bull markets lasted more than 12 years. It ended when the dot-com bubble popped in March 2000.
The average gain in these bull markets was 121%.
The biggest gain realized during a bull market was 582%. It belongs to the longest-running bull market I just mentioned.
As you can see, a 52% gain in the current bull market doesn't even amount to half the historical average.
Yes, the market's valuations are high by historical standards. And nobody wants to overpay for an investment.
But history has also shown that markets can stay expensive.
One way they stay expensive is through faster growth in earnings. That's happening.
Analysts are projecting that earnings for the S&P 500 will grow by 11.3% this year and 14.4% in 2025.
That's above the historical median earnings growth rate of 10.7% over the past 34 years.
And the Federal Reserve is on the cusp of cutting interest rates for the first time in years. Lower rates are fuel for the U.S. economic engine.
In other words, don't panic about the market's recent fall...
We've seen pullbacks like this (or worse) before. Each time, the market roared back to new highs.
Based on past bull markets, there's a lot of upside left. And that means plenty of new highs to reach.
The Power Gauge agrees with this outlook....
Right now, it's "bullish" on the SPDR S&P 500 Fund (SPY). As regular readers know, that's the exchange-traded fund ("ETF") our system uses to measure the S&P 500.
Meanwhile, the recent sell-off has pushed the market into oversold territory.
That means a string of good news in this second-quarter earnings season could spark the next leg higher.
Don't let the fear in the financial media shake you out of the markets.
Good investing,
Vic Lederman
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.48%
9
16
5
S&P 500
-0.5%
121
310
65
Nasdaq
-1.37%
10
64
25
Small Caps
+0.37%
714
1003
254
Bonds
+0.39%
Energy
+1.56%
5
16
1
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks are Bullish. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Energy
+2.77%
Utilities
+2.25%
Financial
+1.58%
Real Estate
+1.1%
Health Care
+1.04%
Materials
+0.46%
Industrials
+0.44%
Staples
+0.17%
Communication
-0.67%
Discretionary
-2.35%
Information Technology
-6.8%
* * * *
Industry Focus
Telecom Services
2
32
5
Over the past 6 months, the Telecom subsector (XTL) has underperformed the S&P 500 by -4.99%. Its Power Bar ratio, which measures future potential, is Weak, with more Bearish than Bullish stocks. It is currently ranked #19 of 21 subsectors.
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