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Here Come the Bears! 5 Reasons Not to Fear a Stock Market Reversal

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Do not let headlines scare you -- the bull market will continue, though a minor correction is possible.

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April is typically one of the strongest months for US equities. This year, however, it appears that a reversal of fortune may be in the cards. For those who are concerned about a significant market correction, or perhaps even the long-awaited "beginning of the end," I suspect you will have to wait a bit longer.

Stocks registered 1%+ losses on Wednesday, and gold (NYSEARCA:GLD) -- a traditional safe haven -- lost nearly 1 1/4%. As a result, I expect the doomsayers to come out swinging, announcing an eminent economic and market apocalypse. To be fair, the problems the world is facing are real. The increasing tensions and threats by North Korea need to be taken seriously. But I suspect, just like in the past, these geopolitical headlines will be short-lived. Ultimately, fundamentals will drive the market -- and with that, investors should take comfort.

Yes, we're up 10% or so, so far this year. Yes, markets are ahead of where most prognosticators (myself included) were expecting it to be by year-end. And yes, the situations in North Korea, Syria, Cyprus, and Iran are worrisome and could become worse. And yes, I could go on listing reasons to stay up at night and reach for the cool side of the pillow as I toss and turn with worry. But that would be ignoring a whole lot of facts.
  • In spite of public dissent by Fed governors and economists, the official stance by the Federal Reserve (which was reiterated just two weeks ago) is to maintain its current monetary policy until unemployment reaches 6.5% or less and/or inflation rises above 2.5%.
  • Although US corporations are about to enter a seasonally difficult period (Q1 earnings comparisons), growth expectations for the full year still stand at 9%.
  • Markets are up 10% over the past year (as well as year-to-date), and earnings have driven these gains – year-over-year S&P 500 (INDEXSP:INX) earnings are up just over 9%. (In other words, earnings have driven market gains, not just liquidity as many argue.)
  • The US housing market is showing real signs of life, and -- although not nearly enough -- the private sector is creating some 200,000 new jobs per year.
  • The United States (and consequently, the US market) is the prettiest house on an ugly block: Europe, Latin America, and in many ways Asia are in worse economic shape than the US. Asset flows show that domestic and international investors are favoring US markets. You can't ignore supply and demand.
At this juncture, investors must be careful not to get caught up in the fray and succumb to headline-driven fears. Caution is always warranted, which is why I believe in investing in high quality, dividend-paying stocks that have strong earnings visibility, and are growing their businesses successfully and steadily.

For the past two weeks, I have been writing that a short -term pullback (perhaps as much as 6% ) is possible. (See: As Market Correction Looms, Investors Face Two Choices.) However, this pullback should not be viewed as a reversal of the bull market.

Follow Oliver Pursche on Twitter: @opursche.


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No positions in stocks mentioned.
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