Positive Economic Signals Show Market Tumble Will Be Short, Strategists Say

After a painful rout, does Tuesday’s turnaround mark a return to bullish times? Long-term fundamentals are too good to brush aside.

The market sell-off Monday, with the Standard & Poor’s 500 dipping 2.6%, did an about face on Tuesday. Nobody knows whether the market will continue its upward trend right away. But the slide does not a portend tough times ahead, like a bear run or a recession, numerous strategists cautioned.

In light of the market’s strong 2017 performance and its rousing encore in January, the recent sharp drop is unnerving, but not as dangerous as it may appear, according to Brad McMillan, chief investment officer for Commonwealth Financial Network. “Put simply, we are out of practice at watching the market go down, which makes a scary day even worse,” he wrote in a commentary.

To McMillan, a growing economy with solid consumer and business indicators and increasing corporate earnings will overpower any passing concerns that prompted the latest downdraft. Higher interest rates amid inflation worries, which many are blaming for the pullback, as well as risks like the pending federal debt ceiling fight in Congress, shouldn’t have staying power, he contended.

Such negative news tends to knock down the market but then it bounces back, a healthy development, he argued. “This is exactly what we saw in early 2016, which is probably the best comparison to today.”

The market’s fall indicates that investors are adjusting to the new landscape of rising interest rates, said Greg McBride, chief financial analyst at Bankrate.com. What we saw, he explained, was a kind of drug withdrawal, as the juice of low rates and central bank bond buying goes away. That’s why investors are threw “a hissy-fit,” he said. “Not because anything is wrong.”

For McBride, larger economic forces are working in favor of better market results ahead: “Let’s look at the big picture – the economy is improving, more people are working, they’re seeing more money in their paychecks, and tax reform will boost the bottom line of businesses and households. If the market is falling, that means it’s now on sale.”

The recent slide “merely returned the index to its early December level; it has given up the gains only of the past nine weeks,” noted Ian Shepherdson, chief economist at Pantheon Macroeconomics. While some insist that the market is overvalued and needs a correction, Shepherdson said rising productivity growth and increasing wages suggest the plummet will be short-lived.

So, he maintained, “while we have been waiting for a correction in stocks for some time, we don’t expect the rout to continue.”

The sell-off was likely “a storm in a tea cup,” said Tom Elliott, international investment strategist at deVere Group. “We will probably see a recovery rally within the week and by next Monday analysts will be referring to this as having been a ‘much needed correction as part of an ongoing rally.’”

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