Why Stock Market's Big Rally Won't Last

Many investors are breathing a sigh of relief that the stock market correction may be over, with the major indexes regaining about half the ground that they lost in the selloff. Not so fast, say some experts. "The speed at which we broke through every one of those technical levels...my sense it's [the selloff] not done yet. It needs to do it again to confirm that the buyers are really there," Kenny Polcari, director of NYSE floor operations for O'Neil Securities Inc., told CNBC.

Strong Rebound

From its peak at the close on January 26 through its intraday low on February 8, the Dow Jones Industrial Average (DJIA) fell by 10.4%, but has gained 5.7% since then, through the close on February 15, cutting the net decline to 5.3%. For the S&P 500 Index (SPX), the respective figures are a drop of 10.2%, a subsequent rally of 5.8%, and a net decline of 4.9%. Nonetheless, Investopedia's millions of readers worldwide are still registering extreme levels of concern about the securities markets, as measured by the Investopedia Anxiety Index (IAI)

'Dialogue Between Earnings and Rates'

There is an especially fervent debate these days between bulls and bears regarding the future direction of stock prices, with the bulls confident that the worst is over, at least for a time, and the bears worried that more big drops are ahead of us. Nick Colas, co-founder of DataTrek Research, is ambivalent, telling CNBC, "This market is going to be a dialogue between the earnings growth fundamentals, which are fine, and rates going up, which is not so healthy for stocks, and the worry that that cascades to something more dangerous later in the year."

In addition to rising inflation and interest rates, as mentioned by Colas, bears see other forces weighing down the markets. Among these are the unraveling of big bets on continued low volatility, overbought conditions, and historically high valuations. (For more, see also: 6 Forces That May Push the Stock Market Even Lower.)

'Slow But Choppy'

Peter Costa, the president of boutique trading firm Empire Executions and a governor of the NYSE, was more definitive in his remarks on CNBC. He said, "We'll have a choppy middle of the year--slow but choppy--and then at the end of the year we will rally, and I do think the market will be up," predicting a gain of about 5% to 6%, per CNBC. Kristina Hooper, chief global market strategist at Invesco, recently offered a similar opinion, predicting a wildly gyrating stock market that nonetheless will be up by year-end. (For more, see also: Stock Investors Should Fasten Seat Belts for More Plunges.)

Ghosts of Crashes Past

Investors with long memories see unsettling parallels today with the financial crisis and stock market plunge of 2008. Among these are high leverage and complex products with poorly-understood risks that eventually blew up. (For more, see also: Stock Sell-Off Has Worrisome Similarities to 2008.)

Meanwhile, just as in the 1987 stock market crash, the recent selloff was hastened and deepened by computerized trading algorithms that created a mountain of selling pressure. These algorithms are now a vastly more significant driver of the markets than they were in 1987, increasing the odds of faster and bigger drops in the coming months. (For more, see also: How Algo Trading Is Worsening Stock Market Routs.)

Bulls Hold Firm

To be sure, a number of big investors today are bullish in the wake of the sell-off. Michael Wilson, chief U.S. equity strategist at Morgan Stanley, sees strong fundamentals that can send the S&P 500 up to 3,000 by mid-year, 9.8% above the February 15 close. That also would be 4.4% better than the record high on January 26.

Marko Kolanovic, global head of macro quantitative and derivatives research at JPMorgan, a division of JPMorgan Chase & Co., believes that worries about inflation and interest rates are overblown. He sees strong earnings, buoyed by tax reform and global GDP growth, as reasons for optimism. In remarks to Barron's, he predicts the S&P 500 to close 2018 at 3,000.

Muted Stock Gains

Others see more muted gains. "I think we've seen the low, but I don't know if we make a new high," is what Bob Doll, chief equity strategist and senior portfolio manager at Nuveen Asset Management, told CNBC in another story. He's sticking with his forecast made at the beginning of 2018, that the S&P 500 will end the year at 2,800, which would be up 2.5% from the February 15 close. Doll expects "reasonable volatility" in 2018, sees continued strength in corporate earnings, and believes that interest rates will not pose a big problem, as long as they "creep higher" rather than "gallop higher."

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