The recent decline in the stock markets can be characterized as an internal correction as broad averages like the S&P 500 didn’t correct much, said Ed Yardeni, President and Chief Investment Strategist at Yardeni Research.
True, NASDAQ had a bigger correction, but if one focuses on the sectors that witnessed sizeable corrections such as biotech and internet stocks, they were fairly highly valued with high P/E ratios. And despite the correction, they are still expensive.
If investors look at growth stocks, the stocks that excite them about the future, there really aren’t that many that might excite them. So they (biotech and internet stocks) tend to attract a lot of investors who are looking to make a killing, which makes them extremely volatile. It’s better to focus on the big-cap companies rather than just technology, industrials and health-care, he noted.
Asked if the bulls were missing something, if they were too complacent, Ed said it’s a misdirected question, because he has been bullish for five years. The good times won’t last forever, but the latest internal correction would actually increase the longevity of the secular bull market.
The more the market internally corrects itself, the more the high-priced stocks would become cheaper. The money would flow to areas that have been left behind in the rally, rather than leaving it. It’s a broad bull market, a very democratic one, and it won’t leave too much behind, he observed.
Asked why the bears have moved to the sidelines and why the bull and bear camps are pretty well split, Ed said the bears aren’t growling as loudly as they used to for the past five years. Many of the bears have made the mistake of fighting the Fed, fighting the central banks.
The folks who run the Fed, the ECB and the Bank of Japan; they have trillions of their own currencies and are willing to spend them to try and keep the economy growing and avoid a deflation. A lot of that liquidity has flowed in the financial markets, into asset prices generally and certainly into stock prices. That’s the first thing they teach at investment schools – don’t fight the central bank, he argued.
Asked if the bulls have run their course, Ed said he has been bullish for five years, and the market now is not cheap. The bull-run won’t last forever. From now on, if stock prices rise at the same pace as earnings, and earnings will most probably grow, investors can expect a decent year and a 10% increase for the S&P 500, he concluded.
You can watch the video here.
Contact Ulli