Reasons for optimism – and distrust – in the US stock market

NEW YORK (Reuters) – One day after Wall Street suffered its worst drop of a day since the financial crisis, investors face an unknown dilemma: betting that stocks will rebound at dawn A bear market, or avoid picking them up for now more fears than they are far from a bottom.

While investors were rewarded for buying the decline during the 11-year bull market, the two shocks of a global coronavirus epidemic and a drop in oil prices increased the price. # 39; uncertainty and shaken confidence in the strategies that have worked in recent years.

Here are four reasons to buy now, and four more that argue for a wait-and-see approach.

TIME TO BUY

The cavalry is coming: new stimulus packages may soon come from central banks and governments around the world. Japan announced Tuesday about $ 4 billion in spending to deal with the economic impact of the coronavirus, while US President Donald Trump said on Monday that he would take "major" steps to strengthen the economy. 39; economy, including possible reduction of social charges.

US stocks rose almost 5% on Tuesday, fueled by hopes of stimulus.

Pay dividends: the craterization of US Treasury yields well below 1% can lead investors to dividend-paying stocks.

Three-quarters of the S&P 500 companies had dividends above the 10-year Treasury note as of Friday, according to US Bank Wealth Management commentary, "providing investors with income and potential for growth." longer-term price appreciation ".

"The dividend income profile of US stocks has improved," according to the market update from US bank Wealth Management.

Play the rebound: Even if the economy is in recession, the historic average drop in the S&P 500 coinciding with a slowdown is 28%, according to Keith Lerner, chief market strategist at Truist / SunTrust Advisory Services. But, Lerner said in a report, "once stocks bottomed out during a recession, a year later, markets climbed an average of 32% and a median of 37%."

"Even if we were to see further weakness in the short term, markets would continue to double-digit higher than the level of (Monday) a year later, should the precedent continue," said Lerner.

A more frightening market: the sell-off, especially the big drop on Monday, indicates that "fear is now on the market" and has shown behavior that is almost the opposite of the complacent behavior observed in early 2020, has said Lerner in an interview. . For example, the put-to-call ratio, a measure to protect investors against the decline in equities, was at its highest level since the end of December 2018, when the market had bottomed out during this decline.

"When expectations are low," said Lerner, "a little bit of good news could go a long way."

Stay cautious

No clear end to the uncertainty: Investors have struggled to model the final impact of the Coronavirus on the economy, as Monday's oil price shock exacerbated the uncertainty.

"A sustainable bottom in stocks requires neutralizing the negative impact of the virus on the economy and profits," said Alec Young, general manager of global market research at FTSE Russell, in a comment sent by email. . "The virus has injected enormous uncertainty into consumer spending, the job market and corporate sentiment."

The economy could experience a recession: in the wake of Monday's sharp decline, investors said that stocks were growing in price in recession. Market shifts varied considerably during recessions, but in the last, during the 2007-2009 financial crisis, the S&P 500 fell more than 50%.

Running out of silver bullets: while investors hope the stimulus will help soothe the markets, there is some doubt about the extent to which it will help, especially from central banks that already have gone through a round of monetary policy easing.

"The limited firepower of central banks compared to 2008, coupled with their inability to resolve a global pandemic (in the absence of coordinated fiscal and public health leadership), increases extreme risks", BofA Global Research said in a report.

Falling from a peak: Even with hindsight, some investors say stocks aren't cheap. The valuation of the S&P 500, on a price / earnings ratio, climbed in February to its highest level since 2002, according to Refinitiv Datastream, after a gain of about 30% last year on Wall Street .

"It is too early to start buying just because the market indexes have sold compared to their historic highs," said Clark Fenton, diversified return portfolio manager at RWC Partners, in an emailed comment.