Subscribe for FREE

Saving and investment contents

8 REASONS TO STICK WITH STOCKS DESPITE VOLATILITY

8 REASONS TO STICK WITH STOCKS DESPITE VOLATILITY

Haitham Sadek 0 Comments

I’ve just read a very good article from Marketwatch.com highlighting several reasons to stop worrying and instead stick with stocks as a great long-term investment.

I thought of summarizing this article and add a couple of other reasons from my 20+ years personal experience in the stock market. I hope you find it useful during this volatile time.

Here are the 8 reason to sticks with stocks despite volatility

Long-term trend is up: The below chart shows the US Stock market trend, as represented by the S&P500 index, for the last 90 years. While there are periods of downtrend during corrections and bear market, the long-term trend is up. People who followed Warren Buffett advice of being greedy while everyone is fearful and bought stocks while the market is down have been rewarded massively.

 

Longer Bull and Shorter Bear: Bull markets last on average about 97 months each and gain an average of 440 points in the Standard & Poor’s 500 stock index. By comparison bear markets since the 1930s have an average duration of only 18 months and an average loss in value of about 40 percent. This means that the market is up for 5 times more than being down and gain more than 10 times during this time than it lost during a down market!

Awesome earnings: Stocks are enjoying an earnings renaissance. According to financial data firm FactSet, first-quarter earnings growth should top 17% to mark the fastest rate of expansion since the first quarter of 2011. Furthermore, on Dec. 31 the forecast was for just 11% growth — meaning the outlook for corporate profits are looking even better despite the uncertainty of the last three months.

Consumer confidence: After big tax cuts at the end of 2017 created optimism, the Conference Board reported that consumer confidence hit an 18-year high in February. Sure, the number softened up a little in March, but let’s not get hysterical about any short-term slip. Or in the words of the Conference Board: “Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.”

VIX not noteworthy: The CBOE Volatility Index (VIX) spiked over 80 twice, and over 70 six times in 2008. “Yes, theoretically the VIX hit its highest level since 2015 with a very short-lived spike to 50 in early February when the Dow Jones Industrial Average (DJIA) saw two 1,000-point declines in the same week. But it has faded into a slightly elevated but rather unimpressive level between around 15 and 25 ever since. A long-term look at the VIX shows plenty of periods where volatility “spikes” to these levels — if it can be called a spike — that didn’t upend the bull market. So let’s not consider any brief pop in the fear index as a guaranteed death knell for the markets.

Fed expectations are clear: The Federal Reserve has done an impeccable job speaking consistently about the course of action and playing the expectations game to perfection. Consider that the market was completely unsurprised by the March rate increase and the CME’s FedWatch putting the probability of no action at its May 2 meeting at 98%. This is remarkable synergy between investors and the Fed, and as long as everyone is on the same page there’s no reason to expect any fireworks. After all, ultimately a shift toward higher interest rates borne out of full employment and robust growth prospects is a good thing, because it speaks to a normalized and fully functioning U.S. economy.

IPOs and acquisitions abound: The successful IPO of streaming radio firm Spotify (SPOT) and the March offering from data storage firm Dropbox (DBX) shows that multibillion tech players aren’t afraid to enter the public markets at this time. M&A is also running hot in 2018, with a record-breaking first quarter thanks to a smattering of big-ticket health-care deals like Celgene (CLGN) acquiring Juno Therapeutics for $9 billion in January and Sanofi (SNY) buying Bioverativ for almost $12 billion. If this were truly a doomed market, we would see this kind of investment activity slowing down — and it hasn’t.

 What’s your alternative? With the interest-rate risks that come with normalization of Fed policy, it’s awfully difficult to imagine moving your money into bond funds. Just look at the iShares 20+ Year Treasury Bond ETF (TLT) which has dropped nearly 4% year-to-date as rates have risen, to underperform the stock market. Worse, the yield gap between a 10-year Treasury note and the 2-year Treasury fell under 50 basis points to start this week (2.78% versus 2.29%). That’s not much of a risk premium to tie up your money for an extra eight years. Unless you want to completely throw in the towel, hiding in the paltry yield of short-term bonds or the security of cash, U.S. stocks are still the best game in town.

Related Article:

BUFFETT’S ADVICE DURING MARKET CORRECTION

STOCK INVESTMENT FOR BEGINNERS

STOCK MARKET CORRECTION- WHAT IS NEXT?

STOCKS BANKRUPTCY CYCLE!

Leave a Comment

Your email address will not be published. Required fields are marked *