The stock market’s surge to record highs since Republican Donald Trump won the presidential election has some investors worried about a pending drop as the euphoria wears off. “Buy the election, sell the inauguration” is their slogan as the next administration comes into power next week.
But it’s not a good idea to speculate on the timing of a correction, such as a decline of 10 percent or more, advises Brian Belski, chief investment strategist at BMO Capital Markets.
“An increasing number of investors are convinced that stocks are on the verge of a meaningful correction, based on our client conversations,” he said in a Jan. 13 report obtained by Newsmax Finance. “Quite frankly, we believe this approach is a mistake.”
Belski points to historical data that show “no reliable roadmap for market corrections” as price trends, corporate profitability and valuation metrics like price-to-earnings ratios are undependable short-term indicators.
“We do not envision a scenario that takes stock prices meaningfully lower from current levels,” Belski said. “Everything we track continues to suggest that we are in the midst of a secular bull cycle.”
The S&P 500 stock index has more than tripled in value since bottoming in March 2009, when the global economy was slogging through the worst economic slump since the Great Depression. The stock benchmark last year rose 12 percent with half of that gain coming after Trump won the presidency on a pro-business campaign platform.
Technology stocks this week drove the Nasdaq Composite Index to record highs, while the S&P 500 still hasn’t topped its December peak. The Dow Jones Industrial Average hasn’t overtaken last week’s record of 19,999.63, a whisker below the much-hyped 20,000 level that is considered psychologically significant to investors.
Mohamed El-Erian, chief economic adviser at Allianz SE, this week said the next leg of any rally needs more direction from Trump and his policymakers.
“Financial markets are in the business of pricing not just current circumstances but also future events,” El-Erian wrote in a column. “These days, they are eager to hear more details of what has been widely interpreted as the pro-growth policy agenda of President-elect Donald Trump. Without such specifics, the Trump rally in stocks will run out of fuel.”
Belski recommends investors sit tight and buy the dips, which has been a reliable strategy for the past eight years.
“As economic growth continues to slowly progress (as expected), earnings growth will eventually provide the support that higher stock prices require longer term,” he said. “We wouldn’t be surprised if the market does give some of its gains back over the near term, but we continue to recommend that investors remain proactive in their approach and use any periods of potential weakness as an opportunity to add selected exposure to U.S. stocks.”
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