Believe it or not, there are still reasons to be bullish on stocks, and not just because pundits keep showing their angst on business TV. (They are often wrong.) Here are some key points for investors to consider.
World economic growth should improve. Forget the idea that the world economy is about to come to a standstill because China hit a bump in the road. Growth is picking up, says Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co. in Boston.
“The biggest focus is, ‘What is global growth next year?’ and some are worried that it’s slowing. But forecasts seem to be optimistic,” says Kleintop, pointing to estimates from the International Monetary Fund for increased global growth — 3.6 percent in 2016, compared to this year’s 3.1 percent.
“They are better forecasters than the central banks,” he says.
The money printing continues overseas. Just as loose monetary policy in the U.S. helped boost stocks, the same is likely overseas, Kleintop says. The economies of Japan and the eurozone are both sluggish, and it seems that both the European Central Bank and Bank of Japan will continue their so-called quantitative easing plans.
Earlier this month, ECB President Mario Draghi hinted that there could be even more stimulus on the way.
The earnings recession isn’t as bad as you think. On the surface, U.S. stocks appear to be in an earnings slump. An analysis by PNC of the first 58 stocks reporting third-quarter earnings showed earnings are down 4.6 percent from last year, and revenues are down 3.2 percent.
But when the energy sector is excluded, earnings and revenues are up 2.8 percent and 2.4 percent, respectively.
“When you look at that type of analysis, with earnings which have increased, it’s starting to look bullish relative to bearish,” says Carey Greenspan, regional director of investments at PNC Wealth Management in the District of Columbia. “There is compelling evidence that the rest of the economy is growing.”
Sentiment is bearish, but that’s good for stocks. Sentiment about where stocks will head next is at extreme levels, according to a recent report from investment bank Goldman Sachs. The report shows that on a scale of 0 to 100, investor sentiment about stocks in the Standard & Poor’s 500 index stands at just 10.
This is one of those cases, however, in which bearish sentiment is actually good for stocks. Institutional asset managers and leveraged funds are “lightly positioned” in the market, Goldman says, suggesting that there will be near-term upside in the S&P 500. This is what’s known as a contrary indicator.
“Very low net positioning tends to be followed by positive equity returns,” the report states. In other words, as investors turn bullish again and start buying stocks, the market will likely trend higher.
The labor market is improving. No one thinks that finding a good job these days is anywhere as easy as it was 10 years ago. That said, it’s clear that things have improved meaningfully since the depths of the financial crisis in 2008-2009. If you remember, that’s when thousands of people got fired month after month.
The unemployment rate continues to fall, and companies continue to add workers. Is that bullish for stocks? Perhaps.
“Improvement in the labor market is bullish to the extent that it leads through to wage growth,” says Scott Clemons, chief investment strategist at Brown Brothers Harriman in New York. He admits to having a wait-and-see attitude to this aspect of the equation.
Year-on-year growth in hourly earnings has remained stubbornly subdued since the financial crisis, hovering around 2 percent the last few years, compared with around 3 percent just before the financial crisis, according to data from the Bureau of Labor Statistics.
If wage growth does start to accelerate, it should filter through into more spending, and ultimately higher earnings at companies.
Low energy prices may help. Likewise, Clemons is in a wait-and-see mode regarding lower energy costs. “To the extent it filters through to lower costs, it could move spending,” he says.
Again, wage earners will need to get out their wallets and spend any energy cost savings for that to be meaningful for company profits.
What should investors do next? If you have cash sitting on the sidelines, the last thing you should do is instantly buy stocks. “Instead, average into your buying over the next month,” says Andrew Adams, a strategist at Raymond James Financial.
That’s what personal finance specialists call “dollar-cost averaging.” Broadly speaking, it means that you won’t get either the very best or very worst prices for stocks. Instead, you’ll get an average, hopefully significantly better than the worst.
Of course, none of this means individual investors should want to mortgage the house to bet on stocks. As always, consult your financial advisor before making any moves.
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6 Reasons to be Bullish on Stocks originally appeared on usnews.com