A robust bullish argument can be made for the stock market going into the first half of 2019. Not only are there multiple fundamental and technical reasons, but the recent sell-off has resulted in many stocks and the overall market trading at relative deeply discounted levels.
"Wait a minute!" I can hear many of you exclaiming. "Didn't this guy just author a scathingly bearish article concerning the stock market's future?" Yes, that is correct. Allow me to explain the seemingly contradictory stance.
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The hallmark of all successful investors is the ability to view the market from both sides. Understanding both the bullish and bearish argument helps to keep your personal biases in check and thus see the market objectively.
Now that I have explained why I look at both sides of the market, here are five reasons to buy stocks right now.
1. The Stock Market Is Relatively Discounted
After an extensive period of new highs, the stock market has finally fallen off its upward trend, trading below its 200-day simple moving average but still not below the 24,000 technical support zone.
While not officially trading at a discount, stocks have pulled back enough to create a compelling case to get long now.
Remember, the S&P 500 is still trading slightly above its decade-long average of 14.5 times forward earnings. Not to mention that Morningstar reports that the average U.S. stock remains priced at 102% of fair value.
2. Interest Rates Remain In Control
While an argument can be made that the Federal Reserve may shock the market with a surprise rate increase, the fact is the Fed has signaled slow, controlled rate increases. Anything other than what the Fed has stated is pure speculation.
History has proved that forewarned, gentle interest rate increases do little to nothing to drag stocks lower.
Climbing interest rates signal a thriving economy which fuels the bull market at its core.
3. Stocks Upward Drift
The stock market has an inherent upward drift. In other words, stock moves higher in the long run despite short-term pullbacks.
"Triumph of the Optimists" by economic professors Elroy Dimson, Paul Marsh, and Mike Staunton helped me understand this upward drift of the stock market.
This book, published in 2002 by Princeton University Press, isn't an investing guide. Instead, it is focused on investment returns over the entire 20th century.
"Triumph" studies 101 years of global investment returns, advising the correct way to measure returns over time. What I found most profound is that from 1900 to 2000, stocks thumped bonds, and bonds beat cash regarding returns. Remember, this is despite sharp downdrafts across the board in worldwide stock markets. Other interesting points include the reality that value stocks outperformed growth stocks from 1926 to 2000.
Proceeding with this understanding makes it much easier to buy sell-offs from the ultra-long term bull market.
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4. The Selling Catalysts Are Played Out
Fortunately, the recent sell-off can be attributed to a short-term bearish catalysts. First, the Trump White House ignited the rally, then confused the market with Trump's volatility storm partially leading to the selling. This is a short-term hazard as I expect Trump to quickly tone down the rhetoric is the face of the falling market.
Secondly, the pending trade war is fizzling as China appears to be backing down slightly with the threats. For example, China lowered the 20% tariff threat to 10% on some items. In other words, the market priced in the worst case scenario which does not appear to be happening.
Thirdly, as was stated earlier, fear of spiking interest rates is purely speculative.
5. The Santa Claus Rally
Also known as the December effect, the Santa Clause rally is the seasonal tendency of the market to climb during the end of December. According to the "Stock Trader's Almanac," stocks rally 75% of the time during the last five days of December.
The reason for this phenomenon is anticipation for the January Effect in which stocks rally as money managers allocate their capital for the year. True or not, odds are we will see a market rally at the end of the year.
Risks To Consider: No one knows what the future holds for the stock market. The market often surprises even the most skilled prognosticators and investors. Always use stops and position size wisely when investing.
Action To Take: Keep an open mind regarding the end of the year into 2019. Remember, anything can and will happen.