Investors have been uneasy since stocks dived 10 percent in just nine days in early February. The market has seen big losses and big gains since, mostly driven by a trade dispute between the U.S. and China, and has yet to return to the record highs of late January.
But some analysts say the market is ready to move in the right direction. Ryan Detrick of LPL Financial says it's a good sign that stocks haven't fallen below the low mark set on Feb. 8, when the S&P 500 fell below 2,600 for the first time since Thanksgiving. To them, there are signs investors are getting more optimistic and that people want to buy stocks, which is a sign the market can go higher.
Detrick, LPL's senior market strategist, said in an interview that even though a lot of investors have been selling lately, "you get rewarded by going opposite the crowd sometimes."
Answers have been edited for clarity.
Q: What does it tell you that stocks haven't fallen beneath their lows from February 8th?
A: Bottoms are a process. They can be frustrating and they can take a while. The positive underlying the last two months of volatility and sell-off is, the underlying fundamentals are still positive. (This earnings season, S&P profits are) expected to be up about 20 percent, which is the strongest we've seen since 2011. Earnings drive long-term stock gains, and volatility could present a buying opportunity depending on how strong they are.
The S&P 500 was up 15 months in a row at the end of January, on a total return basis. That's the longest monthly win streak ever. Markets were due for some corrections, for some volatility, because markets aren't always calm. It was time, things were ripe, and obviously the trade wars and the inflation worries have crept up the last two months. That was the trigger for this well-deserved pullback and volatility. It was a very smooth ride up. There's a saying: elevator up, escalator down. They go up smooth and they come down in a hurry.
Q: Why have stocks moved higher recently, and what is likely to keep them moving in that direction?
A: Trade concerns that clearly dominated the market the last month or so. Hopefully we're not going to have an all-out trade war. That's caused some relief to investors and allowed some of the upward trend. Things have calmed down a little bit on the geopolitical front and we can focus on fundamentals again. Earnings are strong and most of the overall economic backdrop is more positive than negative. Investors are realizing that after that initial whoosh lower. We have expanding earnings globally, multi-decade high manufacturing numbers, continued improving consumer confidence, and services numbers continue to be strong for the most part.
You think back to 2015 and 2016, when we had a big market correction then. Credit markets were really freaking out and nearly priced in a recession. (Now) earnings are expanding and the credit markets are relatively calm. Those are two positives that say this is not the start of a bear market
The fact that small caps are doing so well is a plus, we think. There are more small cap companies, and when small caps do well, that's a lot of market breadth. It's a positive that you see lots of stocks participating in moves. That's a definitive positive sign under the surface.
Q: The strong start to the year was mostly led by growth-oriented stocks. Do you see a similar pattern for the rest of the year or have things shifted, and if so, how?
A: It's not going to be a smooth ride like last year. And last year we gained about 20 percent. We think 10 percent is perfectly normal. The economic cycle ages, we have higher interest rates coming in. It doesn't mean the bull market is going to be over by any means, but as a bull market ages, volatility increases. We wouldn't be surprised to see another 10 percent correction later in the year. And midterm election years can be troublesome. Of all the years of the election cycle, they tend to see the most volatility.
But this global economy is still expanding nicely. That's going to win out in the end.