Two 'Negatives' That Are a Good Thing for Stocks By Chris Igou, analyst, True Wealth
The stock market has undergone a massive shift in recent months... The frothy market in stocks from early 2021 has shifted. The "meme stocks" that everyone loved back then are cooling off... Many have fallen by 30%-plus from their highs. The extreme optimism in stocks is no longer there. In fact, real pockets of worry are showing up right now. And longtime DailyWealth readers know that a bull market doesn't end in worry... It ends in all-out greed. That's why even though the market is near all-time highs today, I believe we'll likely see even more upside in U.S. stocks from here. Today, I'll share two reasons why investors are scared – and, more important, why these concerns are overblown...
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First, consumers are more bearish than bullish on stocks for the first time in 14 months. We can see this extreme through the Conference Board's Consumer Confidence Survey. Each month, this survey goes out to about 3,000 households. One question it asks consumers is if they think stocks will rise, fall, or stay flat. The three ratings tally up to 100%. The specific numbers don't matter much, but the latest update from November highlights a big shift... Today, more consumers expect stocks to fall than to rise in the coming months. That's not a sign of all-out greed to me. It tells me that folks are worried about stocks today. To see what this negative sentiment means for stocks moving forward, I looked at every time consumers in the Conference Board's survey turned bearish on stocks for the first time in 12 months. This data goes back to 1991. Since then, we've had 18 other cases like what we're seeing today. And overall, it was an incredibly bullish sign for the S&P 500 Index. Take a look... When consumers turn bearish like they just did, you want to own U.S. stocks. In fact, the typical annual return after one of these extremes is nearly 12%... And 15 of the 18 previous times led to additional gains over the next year. That's an 83% win rate. I would take those odds any day. Put simply, consumers' current fears are fuel for a continued stock market rally. And that isn't the only sign of worry in the market today. The sky-high valuations from earlier this year are fading as well... Companies had to shut down operations during the COVID-19 pandemic. Those shutdowns hurt quarterly earnings... And, in turn, price-to-earnings (P/E) ratios soared. The S&P 500's P/E ratio hit 31 back in February. That's the highest valuation we've seen in at least the past 70 years. Take a look... You can see the spike as the pandemic took hold... This peak in the P/E ratio eclipsed the previous record of around 30, which was set back in 2000 during the dot-com bubble. But unlike the dot-com bubble, we didn't end up with a market top. Something unexpected happened through the rest of 2021... The S&P 500's record-high valuation fell back to Earth. The companies that stopped bringing in earnings are back in business. And now, they're thriving... Strong earnings have helped the S&P 500's P/E ratio drop to 25 today. And that's in spite of a fantastic year of stock performance. Simply put, stocks are up a lot this year, but earnings are up a lot more. And that trend should continue... Analysts expect another good year of earnings performance in 2022. So the S&P 500's forward P/E ratio is 21.5. In other words, high valuations didn't kill the bull market. And while they're still elevated at the moment, they're likely to keep falling from here. These two "negatives" – bearish sentiment and high valuations – might seem scary. But what we're seeing is actually good for stocks. Tomorrow, I'll share one more major shift happening in the markets... And, once again, it isn't the bad news you might expect. When you put it all together, it's clear that today's rally can continue into 2022. You want to stay long. Good investing, Chris Igou Further Reading Melt Downs always come after historic market booms. But while one will happen at some point, it's not likely to arrive any time soon... Get the full story here: Why I No Longer Expect a Market Crash This Year. Bull markets don't die of old age. After the huge rally we saw this year, the recent dip in stocks might seem like the beginning of the Melt Down. But two important signals are still giving us the "all clear" today... Read more here and here. |
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