Stock Market in Turmoil: Three Reasons Not to Sell Stocks
The past week has been a tumultuous one for the stock market. The US markets and the major Asian markets have also decreased during the week. The Straits Times Index was not spared, declining more than 150 points to end the week at 3,377.
In this period of turmoil and fear, many investors are wondering what they should do with their investments. However, despite the near-term uncertainties, I believe the long-term outlook of stocks is still very bullish, and investors should have nothing to worry about.
U.S economy remains strong
Just recently, the US reported that jobs and wages were up in January. Unemployment is at a 17-year low of 4.1%. Wages increased 2.9% from a year ago. This, in turn, has led to increased business and consumer spending. Sales of existing homes have reached an 11-year high and demand for housing and construction continues to accelerate.
Furthermore, Americans have been managing their debt load much more prudently than before. Total household debt (which includes mortgages, credit card debt and student loans) only made up around 95% of disposable income in the third quarter of 2017. This is much less than the 120% levels before the great financial crisis.
Global economy expanding
Almost 120 countries experienced accelerated growth last year. That is the most in eight years. Countries in the Eurozone experienced a 2.5% growth while Japan has seen seven straight quarters of expansion. Singapore’s economy also grew by 3.5% last year and is expected to equal that growth again this year.
Regionally, Malaysia is expected to grow at a robust 5.8% in 2018. South East Asia’s largest economy, Indonesia, is also likely to continue its steady growth trajectory at 5.6% per annum for the next two years.
Stocks prices still not at unreasonably high levels
Even before this week, the average forward price-to-earnings (PE) ratio for stocks in the S&P 500 was 19 times. Add in the additional earnings of the tax reform and the market was trading at around 18 times its forward earnings. Looking back from 1990 to January of this year, the S&P 500’s average PE ratio is 23.85. This means that the market was already trading at a discount to historical averages.
Furthermore, many of the index components are seeing high earnings and revenue growth rate, which can justify their rich valuations. With this in mind, I do not think stocks are over-valued, especially so after the past week’s decline in the US stock market.
The Foolish bottom line
Volatility is part and parcel of the stock markets. We should not fear it but instead, take advantage of the volatility to find bargain investments. Despite many investors taking a precautionary approach during market downturns, I prescribe taking the opposite approach. As Warren Buffet famously said, “ Be fearful when others are greedy and be greedy when others are fearful.”
Now is the time to be greedy.