Stocks Market falls, is it time to sell or time to buy stocks?

With the Stock Market falling almost 10% in less than a week, investors are left wondering what happened? Is it time to buy more stocks or is it time to sell?

The global economy looks good, inflation is still low and corporate earnings look quite good. So why have stocks fallen almost 10% in less than 1 week?

In my view this correction boils down to two things:

  1. Higher US Bond Yields
  2. Program trading

The bull market in stocks has been supported by quantitative easing (QE) by central banks over the past 10 years. Government bonds have been offering miserly interest rates which made them unattractive to investors. That drove money into the stock market sending stocks to record highs and very high multiples of earnings.

Now that interest rates are on the rise in the US, investors maybe questioning those lofty earnings multiples in the stock market. When the 10 year Bond Yield got over 2.7%, the stock market rally started to halt and pull back slightly. But why did we have such sudden drops in stock prices on Friday the 2nd February and Monday the 5th February?

The action in the stock market on Monday the 5th Feb 2018 can only be described as chaotic. In 1 hour of trading the Dow dropped over 800 points gained 600 points and then fell again. This suggests that trading algorithms are at play. This is where sell or buy orders are created when certain ‘technical’ levels are met. This then becomes a self fulfilling prophecy…as markets fall, more technical levels are breached, more sell orders are created and the cycle continues until we hold at a significant support level.

On a fundamental level, nothing has changed. Inflation is still low, the global economy looks healthy and corporate earnings are good. In my view, the recent fall in stock prices is welcome and is quite simply a correction from very high earnings multiples.

How low can the stock market go? In the short term, this sell off could continue and it wouldn’t surprise me to see the S&P 500 below 2500 (another 5% lower). However, I do feel that there is good value below those levels.

My fair value forecast for the S&P 500 for 2018 is 2630 and 2900 for 2019. Assuming fundamentals don’t change I’d be a buyer of this market below 2500.

However, should inflation increase substantially or the chances of a recession increase, these forecasts would be revised downwards.

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