7 Reasons Not To Be Pessimistic About Stocks Today

Image: Sam valadi

The stock market rout has given investors plenty to fret about, as the S&P 500 Index has slumped more than 7% so far this year.

Worse, some high-fliers, like Amazon.com AMZN, +1.64% and Netflix NFLX, -2.82% have been under pressure in recent weeks, making many wonder if there’s anything worth owning.

Hysterical headlines haven’t helped. And short-term declines on Wall Street aren’t the whole story. There are, actually, a lot of reasons to have confidence in stocks this year.

I’m not saying 2016 will see double-digit gains, or that the declines in certain stocks, notably energy companies, aren’t warranted. But there are many more opportunities than you might think.

Here are seven reasons you shouldn’t give up on stocks this year, despite the short-term volatility:

Jobs:The rebound in the U.S. job market since the Great Recession has been nothing short of remarkable. The headline unemployment rate is holding strong at 5%, and the December jobs report showed an impressive 292,000 jobs created, trouncing expectations and building nicely on previous job creation. There are, indeed, serious problems in the global economy, but the U.S. labor market is not one of them.

Housing: An equally big driver of the U.S. economy is the housing market, and most indicators continue to point upward for the industry. In the latest “Beige Book” report from the Federal Reserve, “residential construction activity was described as modest or moderate” in most areas. And from a price perspective, the latest S&P/Case-Shiller composite of home prices rose again month-over-month and posted a 5.2% annual increase. Top that off with December data on housing starts that showed double-digit growth in both new construction and permitting, and it adds up to a healthy real estate market.

Oil: Cheap energy prices are causing plenty of pain, from lost jobs across the industry to the threat of bankruptcy for overleveraged companies. However, the rough math on Wall Street is that every penny we see shaved off from gas prices equals an extra $1 billion in discretionary income for American consumers. Separately, a recent study showed that for every dollar consumers save at the pump, they spend an extra 73 cents elsewhere in their communities. Since consumer spending is the lifeblood of the U.S. economy, cheap oil has enough benefits in broad economic stimulus to outweigh the specific troubles of energy companies.

Insulation from China: I recently wrote a column on why China’s crash isn’t as bad as you think, and the most compelling reason is the relative insulation of the U.S. economy and stocks from the Chinese market. Citigroup estimates that only 0.7% of overall GDP has direct China exposure, and the very nature of China “A” shares limit foreign investors from deploying too much capital in that country. While China’s slowdown matters, it matters much more to trading partners in emerging markets than the U.S.

Valuations: While there will always be stocks that trade for nosebleed price-to-earnings ratios, the market as a whole looks more fairly valued with each passing day. Currently, the forward P/E of the S&P 500 is only 15.8 or so, down from a peak close to 19 last year. Digging into specific picks, a host of big-name financial stocks including insurer MetLife MET, -0.97% and Bank of America BAC, +1.87% are trading for more than 30% discounts to book value. Elsewhere, automaker General Motors GM, -2.41% and retailer Best Buy BBY, +2.57% are trading for less than a third of next year’s sales. This is a long way of saying that there are challenges out there, but that Wall Street is starting to price many of these shortcomings into a host of stocks across all sectors.

U.S. dollar: The persistently strong U.S. dollar has acted as a big anchor on corporate profits for about a year, and a surge in the currency in the final months of 2015 added to concerns. However, the U.S. Dollar Index peaked at the beginning of December and has actually rolled back modestly even in the face of a Fed interest-rate increase. The fact that the U.S. dollar isn’t running much higher means that the currency headwinds faced by multinational companies at least won’t get any worse, even amid tightening policy at home and easy-money policies abroad.

The long term:
It’s worth noting, of course, that a bad January does not a bad year make. It’s fashionable to cite the “January effect,” where the gain or loss in the first month of the year dictates the overall direction of the market 75% of the time. But investors who really care about statistics and trends should also listen to the preponderance of evidence that shows market timing doesn’t work. There has literally never been a 20-year period in the past century or so that has resulted in a negative return for stocks, so investors with the patience and constitution to see their portfolio through an admittedly rough start to the year should be rewarded regardless of the gloom and doom.

Original article from MarketWatch.com