(By Michael Vodicka) The last four weeks have been absolutely brutal for stocks. After topping off above 1,405 on May 1, the S&P 500 fell close to 10%, finding a short-term bottom at 1,278 on June 4th. Making matters even worse is that bearish action comes on the heels of what had been looking like a great year for stocks, with the market posting 8 straight months of gains through April that had the averages trading back to multi-year highs.
That move lower was driven by the usual apocalyptic scenarios out of Europe, with sovereign bond yields in Spain, Portugal and Italy climbing higher. It was also fueled by weakness in global economic data, with a few disappointing jobs report on the domestic front and further slowing in China weighing on the market. So when you add it all together, it was enough to put a serious dent in confidence, with investors selling stocks at a breakneck pace as fear gripped the market.
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But just as Warren Buffet says, that is the exact time to be greedy, when the market is operating on fear and the bears have clear control of the action. Because longer term, even though the market and economy are dealing with some tough issues, there are four very good reason to be bullish on stocks and use the most recent dip as a chance to buy some of your favorite names at a temporary discount.
Top 4 Reasons to be Bullish on Stocks
There is a very classic saying in the market that goes, "don't fight the Fed." Once again, that has held very true for the last three years as the Fed has unleashed of monsoon of policy tools to stimulate growth. During that time, the market has dipped lower on numerous occasions as the Street saw the end of the world coming. But every time, a recovery was close at hand as the market was continually reassure by the most powerful central bank in the world that it would be there to stimulate on any long-term weakness. No doubt that the Fed has used up a lot of its bullets at this point, with interest rates trading at near-record lows. But don't underestimate the commitment of the central bankers to keep the market orderly and economy growing. The next Fed meeting is set for June 18-20, and the market is crackling with anticipation to see how it will respond to the latest bout of weakness in stocks and the economy.
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The European Central Bank (ECB)
Is anyone noticing a trend here? If so, then you get two gold stars for being totally correct. The European Central Bank does not have the fiscal authority or power of the Fed, but none the less, it is squarely in the eye of the hurricane as the most influential financial entity in the ongoing mess that is the Euro zone. Up to this point, the ECB has resisted calls to provide more financial support for its member countries through issuing Euro bonds or providing additional bailout packages. But the ECB has also been painted squarely into a corner, faced with choosing between financial Armageddon as the Euro zone melts down or providing more assistance. Neither of these options appeals to the ECB, but when forced to choose between the lesser of two evils, it will choose the path of least resistance, which is clearly more stimulation to keep its monetary union intact.
Moving beyond the influence of the central banks in the current economic climate, corporate earnings continue to be absolutely stellar, with total S&P 500 earnings now back to peak levels from 2007. That's because the problems with the global economy never had anything to do with the private sector in the first place. The problems with the global economy were all related to the financial sector and too much government debt. In the meantime, companies that were already healthy and producing big-time earnings growth were forced to get even stronger and more competitive. Now, a few years down the line, margins are sky high and productivity is through the roof, two things every investor should look for in great companies. And let's not forget how strong corporate balance sheets look either, sitting on record amounts of cash and little debt that provide additional flexibility to fuel growth and sustain general volatility.
With S&P 500 earnings moving back to record levels from 2007, the valuation picture looks quite compelling. Back then, the S&P 500 was trading above 1,550, a 15% premium to today's close of 1,308. Bigger picture, over the last ten years, the S&P 500 has traded with a median forward PE of 16X, so its current reading of just 12.4X puts the index well into value territory and much closer to the low print of 11X than the high of 20.5X.
The Take Away
There is no doubt that stocks and the economy are grappling with some pretty serious issues these days. Uncertainty out of Europe alone can sometimes make you want to throw your arms in the air and say forget it. But that's what separates the winners from the losers. Taking a rational approach to investing and taking a closer look at the numbers reveals that there are more than a few reasons to still be bullish on stocks and use the latest pullback as a chance to buy. I know I am.
S&P 500 Year to Date-Daily Chart