Traders work on the floor of the New York Stock Exchange. Investors are unclear whether the bull run is coming to an end or the markets are simply going through a correction. Photo: Reuters
Traders work on the floor of the New York Stock Exchange. Investors are unclear whether the bull run is coming to an end or the markets are simply going through a correction. Photo: Reuters

Bull or bear: which route should investors take?



A sharp pullback in stocks last week, including the S&P 500's biggest single-day drop since a market correction in February, has left investors questioning whether this could signal danger for the longest-ever bull run for US equities. Here are five arguments on either side of the debate:

Reasons to be bullish

• Profits, profits, profits

Strong growth in US corporate profits underpins the case for the bull market continuing its run. S&P 500 earnings are expected to rise 23.1 pervcent this year, according to I/B/E/S data from Refinitiv.

“If you still think the corporate profit story is intact, you should be owning stocks here,” says Chuck Carlson, chief executive officer at Horizon Investment Services in Indiana in the US.

• It's the economy, stupid

Federal Reserve chair Jerome Powell last week said the outlook for the US economy is “remarkably positive,” and strategists are quick to note that it is rare to have a bear market when the economy is expanding.

“When you don’t have a recession, typically pullbacks can be sharp, but they tend to be short,” says Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Massachusetts.

• Higher interest rates are not big deal

The spike in US Treasury yields spooked stocks but rising rates are less concerning if they are gradual.

“We believe we are in a reflationary environment ... and hence, rising rates tend to be associated with rising stock prices,” Thomas Lee, Fundstrat’s head of research, said in a note.

• Market corrections are a good thing

Sharp market pull-backs are viewed positively in the context of a long bull run because they rid the market of complacent investors and shake off pricey valuations.

“You need these periodic cleanses to kind of refresh and then allow the market to move higher,” Mr Carlson says.

• The buyback is your friend

Some market-watchers have pointed to a recent “quiet period” preventing corporate stock buybacks as a potential reason for a lack of support during the volatility. But companies are expected to keep using their cash to repurchase their stock, keeping demand for equities high. Goldman Sachs strategists expect S&P 500 buybacks to climb by 22 per cent to $940 billion in 2019.

Bucky Hellwig, senior vice president at BB&T Wealth Management, says that buybacks are “sustainable:” “You’ve got companies generating a higher level of cash flow based on the tax cuts that are in effect now, and that cash flow has to go somewhere.”

__________

Read more:

It's too early for investors to take a defensive stance

Are we ready to handle the next financial crisis?

The issues behind the latest market sell-off are unlikely to disappear

Is the US dollar heading for a crash?

What next for your portfolio: growth, value or momentum investing?

__________

Reasons to be bearish

• Earnings are shakier than they seem

After this year’s tax-fueled boost, S&P 500 earnings growth is expected to step down to 10 per cent in 2019. Some investors worry that even that rate may be too high, given pressures from rising wages and other increasing costs.

“The bull case is predicated on earnings being OK and if we actually see earnings estimates roll down ... that’s a big risk,” says Keith Lerner, chief market strategist with SunTrust Advisory Services in Atlanta.

• The Fed does not have your back

Mr Powell’s recent comments that rates need to continue to move toward an estimated neutral level and even a bit beyond are a concern for investors who believe the central bank may increase rates too quickly.

“The Fed could tighten too much, especially given that it is using two tools at the same time - rate hikes and balance sheet normalisation,” says Kristina Hooper, chief global market strategist at Invesco. “That has the potential to choke economic growth and create disruption and volatility in the stock market.”

• Politics - clouds on the horizon

Investors point to risks from increasing tensions over trade between the United States and China, the world’s two biggest economies.

“The growing tariff wars have the potential to negatively impact economic growth,” Mr Hooper says.

Turmoil in Washington also creates unease on Wall Street, and volatility could rise ahead of the November congressional elections.

• Bonds are enticing

Key to the run in stocks has been their relative yield advantage over other assets, namely bonds. But the rise in bond yields means they are increasingly attractive and may start to lure away investor resources from stocks.

“If bond yields start offering competition to equities, then the favourable case for equities versus bonds is adversely affected and that is the key thing to watch out for,” says Vinay Pande, head of short-term investment opportunities at UBS Global Wealth Management.

• Tech wreck

Shares of technology and other Internet-related companies have led the stock market’s ascent to record highs in recent years, but those shares have particularly suffered in the recent pullback.

If tech continues to stumble, some investors are concerned that other sectors will fail to pick up the slack in any market rotation.

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Whole-of-life insurance: as its name suggests, this type of life cover is designed to run for the rest of your life. You pay regular monthly premiums and in return, get a guaranteed cash lump sum whenever you die. As a result, premiums are typically much higher than one term life insurance, although they do not usually increase with age. In some cases, you have to keep up premiums for as long as you live, although there may be a cut-off period, say, at age 80 but it can go as high as 95. There are penalties if you don’t last the course and you may get a lot less than you paid in.

Critical illness cover: this pays a cash lump sum if you suffer from a serious illness such as cancer, heart disease or stroke. Some policies cover as many as 50 different illnesses, although cancer triggers by far the most claims. The payout is designed to cover major financial responsibilities such as a mortgage or children’s education fees if you fall ill and are unable to work. It is cost effective to combine it with life insurance, with the policy paying out once if you either die or suffer a serious illness.

Income protection: this pays a replacement income if you fall ill and are unable to continue working. On the best policies, this will continue either until you recover, or reach retirement age. Unlike critical illness cover, policies will typically pay out for stress and musculoskeletal problems such as back trouble.

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