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Why Stocks Should Rise From Here

Lisa Shalett, Wealth Management Head of Investment and Portfolio Strategies
Some investors are worried we’ve seen the best this economic cycle has to offer, but here’s why that concern is premature.

The market has taken investors on a rollercoaster ride this year that shows no sign of slowing. Remarkably, as April comes to a close, the S&P 500 is nearly unchanged, even though corporate earnings have surged -- up nearly 25% for the first quarter. 

Investors have had good reason to wonder if this is as good as it gets for stocks and the economy.  Businesses and consumers face higher costs as inflationary pressures and interest rates rise. Last week, 10-year Treasury yields reached a four-year high, briefly topping the psychologically significant 3% mark. Commodities and labor prices are higher, eating into corporate profit margins.

While these pressures are real, I believe it is premature for investors to assume the market has peaked. Here are five reasons why I don’t think the bull market is going to end soon:

  • Global economic growth remains above average thanks to ongoing economic stimulus and increased capital spending. Global GDP growth is expected at 3.8% in the second half of this year and next. That’s up from the 3.4% average from 2012 to 2016. Even in the U.S., there is room for continued economic growth due to fiscal stimulus and deregulation.
  • Inflation, although higher, is unlikely to surge. I expect it to remain restrained due to labor market slack and the deflationary force of technological advances.
  • Interest rates will remain moderate adjusted for inflation, even as the Federal Reserve keeps hiking. The Fed is still in the process of normalizing monetary policy after pushing rates to near zero following the financial crisis. It’s not trying to restrain growth.
  • Productivity gains due to increased capital spending on technology will offset some of the pressures on profit margins. Deregulation will help curtail costs, too.
  • Valuations remain attractive. With the S&P 500 price/earnings ratio at 16, down from 18 earlier this year, stocks don’t seem overpriced. 

Bottom Line: Markets typically peak six months before a recession and I think one is unlikely before 2019 or 2020.  Markets can move higher in the next six months, but will likely rotate from old leaders to new leadership. I continue to think more defensive sectors like energy, financials, industrials, health care and “old” tech make the most sense now.

Risk Considerations

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

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