For most investing pros, last week’s downturn in global stock markets reminded investors why they need to pay attention to risk – but it isn’t reason to bail out of the market entirely.
“It is like a flu shot: It stings a little bit, but it is in the best interest of the patient in the long run,” said Tom Coxhead, a financial consultant with RBC Dain Rausher in Denver.
A nearly 9 percent decline in the Shanghai composite index early last week triggered a global downturn that shaved 5 percent to 6 percent off U.S. market indexes through Monday of this week.
Still, U.S. economic fundamentals remain solid and plenty of money is sitting on the sidelines to fuel additional stock purchases, said David Joy, chief market strategist with RiverSource Investments in Minneapolis.
“We haven’t had a correction for so long, we talked ourselves into it,” he said. “A correction does not necessarily equate to the end of a (bull market) cycle.”
Joy and other optimistic market analysts point to several factors that may continue to support U.S. stocks:
U.S. markets remain fairly valued, or even undervalued, by historical measures such as price-to-earnings ratio.
Although certain emerging stock markets, like China, overheated, U.S. stocks have lacked the widespread speculation typical of a market top.
Corporations have been buying back billions of dollars worth of shares, and investors still have heavy cash holdings that could come into the stock market. That could fuel further market price gains, especially if investors in foreign stocks and real estate return to domestic stocks.
A rebound in stock prices Tuesday seemed to lend credence to the optimistic view. The Dow Jones industrial average rose 158.2 points, or 1.3 percent, and the S&P 500 jumped 21.29 points or 1.55 percent. These U.S. market indexes fell slightly Wednesday.
“It is difficult to get hurt jumping out of a basement window. We don’t see the market as being at lofty levels,” said Craig Callahan, president of Icon Advisors in Greenwood Village.
The investment model that ICON uses for its family of mutual funds estimates the U.S. stock market is undervalued by about 21 percent, Callahan said.
To be sure, few market watchers are predicting strong stock-market gains in the next few months. And most expect market volatility to be high.
The optimistic view of today’s stock market assumes that problems in the housing and auto sectors of the U.S. economy remain contained and don’t tip the larger economy into a recession later this year. It also assumes that inflation won’t get out of hand.
Callahan attributes today’s market volatility to a battle over which sectors will lead the market higher.
In a stock market runup that began in 2003, small and medium-sized industrial and material companies, which are abundant in emerging markets, have been the star performers.
Last summer, the stocks of large companies with steady earnings growth took the lead. Then small and mid-sized companies began to surge again.
Money waiting to find a home will shift into one of these sectors, although it’s not clear now which one, Callahan said.
Relative calm
Investment advisers and stock brokers, meanwhile, note that their clients showed relative calm in the face of last week’s downturn.
“We are not experiencing any panic or any unusual level of concern from our clientele,” Coxhead said. “We have been through so many of these moves, we are not terribly upset or concerned at this point.”
The market may visit recent lows, but it won’t turn into a bear, defined as a 20 percent decline.
“I would argue that we are past, if not well past, the halfway point of the magnitude of the decline, but not halfway in terms of the amount of time,” said Bob Doll, chief investment officer of equities with BlackRock Global in Princeton, N.J.
U.S. stock markets should end the year higher if economic growth remains on track and inflation stays in check, bullish investors argue.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
