Why You Should Buy the Sell-Off

Many investors were rattled by the 6% drop in the S&P 500 Index (SPX) last week, worried that a big correction may be underway, if not the start of a long-delayed bear market. At least two prominent market strategists disagree. Scott Wren, senior global equity strategist at Wells Fargo & Co. (WFC) told CNBC: "We're trying to get our clients to buy on these pullbacks. We think this thing still has some upside the rest of the year." Meanwhile, John Normand and his strategy team at JPMorgan Chase & Co. (JPM) advise clients "to be buying the dip," per a note cited by Bloomberg.

 While the S&P 500 (SPX) and Dow Jones Industrial Average (DJIA) rebounded sharply in Monday trading, they remain significantly below their highs in January. That indicates there may be more room for gains ahead. 

'Valuations Are Not Stretched'

In his remarks to CNBC, Scott Wren believes that the corporate tax cuts passed in December will increase the U.S. GDP growth rate from 2.3% in 2017 to 2.9% in 2018, and that corporate earnings will continue to rise as a result. In fact, he expects that the current economic expansion has been extended by at least another year as a result of the tax cuts, and that inflationary pressures will be modest.

While many other observers worry that stocks are still dangerously pricey, Wren does not. As he also told CNBC: "Valuations are not stretched. Are they at the average or the median? No they're not, they're a bit higher than that, but they're not dramatically higher than that."

CNBC notes that the forward P/E ratio on the S&P 500 ended last week at 16.5 times earnings, down from a recent high of 18.6 in January, and far below the value of 25.8 reached during the dot-com bubble. Nonetheless, cautious investors still worry that valuations remain well above long-term historical norms. (See also: Why the 1929 Stock Market Crash Could Happen in 2018.)

Additionally, while buying on the dips has been a winning strategy so far in this long bull market, no one can be certain whether the next dip is really just a temporary setback—or  the start of a deeper and more protracted decline. Moreover, contrary to Wren, other observers have seen indications of an economic slowdown. (See also: 'Buy On The Dip' Is Alive and Well as Investors Bet on Rebound.)

Markets Are Stabilizing

"Two of four conditions for market stability have been met (tamer inflation, not-so-hawkish Federal Reserve), and the two others could align in the second quarter (stable activity data, de-escalation of trade conflict)," according to the JPMorgan strategists, as quoted by Bloomberg. While they recognize that trade conflict will be a negative for the U.S. economy, they estimate that President Donald Trump's tariffs put less than 0.5% of U.S. GDP at risk, while they rate China's response so far as "disproportionately mild," per Bloomberg. In this vein, Wren told CNBC, "I just really think this is not going to be an all-out trade war," while also discounting the likelihood of four rate hikes this year by the Fed.

Sector Recommendations

As reported by Bloomberg, the JPMorgan strategists suggest that investors be overweight in stocks versus bonds. Among equities, they favor financials, industrials, oil and emerging markets stocks. Though Bloomberg did not cite any specific recommendations from JPMorgan in these sectors, Goldman Sachs Group Inc. (GS) recently offered a list of high growth stocks that they expect to outperform in the long term.

Among Goldman's picks are, with their year-to-date price moves through the close on March 23: in energy, Concho Resources Inc. (CXO), +1.1%, and EOG Resources Inc. (EOG), -3.3%; among financials, Charles Schwab Corp. (SCHW), unchanged, and Comerica Inc. (CMA), +14%; and among industrials, United Rentals Inc. (URI), +0.4%, and Deere & Co. (DE), -6.3%. United Rentals and Deere were not mentioned in our recent stories about Goldman's high-growth stock list, but both have attractive PEG ratios of 0.7 and 0.6, respectively, per Goldman's analysis. (See also: 9 High Growth Stocks for an Uncertain Market and 12 Growth Stocks That Will Win Long Term: Goldman.)

'An Economic Crisis'

Unlike the strategists at Wells Fargo and JPMorgan, Nobel Laureate economist Robert Shiller of Yale University is deeply concerned about the impact of trade tensions with China, according to another CNBC report. He notes that trade with China is vital for the supply chains and business models of many U.S. companies. If this trade is disrupted, he told CNBC that "The immediate thing will be an economic crisis because these enterprises are built on long-term planning." Additionally, regarding the uncertainty that President Trump has created with his tariffs, Shiller added, "It's exactly those 'wait and see' attitudes that cause a recession."

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