The S&P 500 just saw its first correction in almost two years. No question that made a lot of investors a bit nervous.
However – despite the recent wave of volatility – the S&P 500 is off to a great start to 2018 and I see more gains ahead. Let’s take a closer look.
Global stocks were off to a blazing start in 2018.
The S&P 500 was up 7.5% on the year on January 26. Take a look below.
What you can also see in the chart – after notching a new all-time high, the S&P 500 saw a pretty sharp pullback of 10% in the next two weeks.
There’s no doubt that weakness rattled some nerves. It’s never fun for investors to see weakness in the stock market.
However – there are two key reasons why I don’t see the pullback as anything to worry about.
#1 Global stocks were long over due for a correction.
The global stock market had been on a tear since November of 2016. In fact, by October of 2017, the S&P 500 had notched a new all-time record for the longest run without a 3% correction.
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The bottom line here is that global stocks were long over due for some kind of pullback.
#2 Pullbacks are a normal part of a healthy market.
Despite the record run higher, pullbacks, corrections and even bear markers are actually normal events in otherwise healthy markets.
According to a study from mutual fund company American Funds, a pullback of 10% or more happened about once every year from 1900 to December of 2014.
Bear markets (more than a 20% decline) are less common, happening only once every 3.5 years.
Take a look at the frequency of corrections and pullbacks in the table below.
As you can see, corrections are nothing to fear.
And despite the big wave of volatility – I see plenty of reason for optimism.
The S&P 500 was Very Quick to Rebound
After the quick drop, the S&P 500 was very quick to rebound.
The US index was up more than 5% last week, its best weekly gain since 2011.
That is a bullish signal. It tells me that investors with cash on the sidelines was the drop as a chance to buy.
The Global Economy is Accelerating
I know this may shock a lot of people who are used to seeing nothing but negative, fear mongering headlines in the “lame-stream media” – but the global and US economies are strong and accelerating.
Gross Domestic Product (GDP) is the broadest indicator of economic strength. Anything above 3% is considered to be very solid.
In 2016 global GDP came in at 3.7%.
According to the International Monetary Fund (IMF), a leading financial think tank and research agency, global GDP is expected to accelerate to 3.9% in 2018 and 2019.
These are excellent growth numbers and the strongest we have seen since the financial crisis 10 year ago.
That should be a very strong tail wind for consumer spending and corporate earnings – two powerful forces for stock prices.
S&P 500 Earnings Set to Hit New All-Time High in 2018
Speaking of earnings, S&P 500 earnings are on fire – and this is the single most important factor influencing the performance of US and global stocks.
According to Zacks Investment Research, S&P 500 earnings will expand an impressive 20.4% in 2018 to hit a new all-time high. Take a look below.
These are my leading indicators – and they are all telling me that stocks should have another good year in 2018.
What Should We Expect Moving Forward?
I am expecting more volatility. But like I said, I don’t think it’s anything to worry about.
I do not see another big stock market crash coming like we saw in 2008.
And if we do start to see a bigger plunge – I have no doubt in my mind that the global central banks will quickly step in to pump the market.
I’m a free market capitalist – which means I’m not crazy about central banks getting involved in the market. But that is the new reality after 2008 – there’s no way the central banks will let that happen again.
That’s why I view pullbacks as a chance to buy on a dip.
Other than that – I also encourage everyone to completely ignore the financial media.
These people are useless idiots. They have never managed a dime of money in their whole life. They know nothing about investing and markets.
They love to spread fear for one simple reason: studies have proven that negative headlines get 20X more views or clicks.
The S&P 500 is Actually off to a Great Start in 2018
Despite the volatility, the S&P 500 is actually still off to a great start to 2018.
The index is up 2.5% in the first six weeks.
If it kept that pace up the S&P 500 would gain 22% in 2018.
That’s all for now. I’ll be back in a few weeks with another update.
Your Investment Partner,
Mike
This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.
