October 15, 2018 / 11:00 AM / a month ago

RPT-Bear or bull? Five reasons to claw or thunder

 (Repeats with no changes)
    By Lewis Krauskopf and Caroline Valetkevitch
    NEW YORK, Oct 15 (Reuters) - A sharp pullback in stocks last
week, including the S&P 500's        biggest single-day drop
since a market correction in February, has left investors
questioning whether this could signal danger for the
longest-ever bull run for U.S. equities.
    The following are five arguments on either side of the
debate:
    
    REASONS TO BE BULLISH
    PROFITS, PROFITS, PROFITS: Strong growth in U.S. corporate
profits underpins the case for the bull market continuing its
run. S&P 500 earnings are expected to rise 23.1 percent this
year, according to I/B/E/S data from Refinitiv.
    “If you still think the corporate profit story is intact,
you should be owning stocks here,” said Chuck Carlson, chief
executive officer at Horizon Investment Services in Hammond,
Indiana.
        
    IT'S THE ECONOMY, STUPID: Federal Reserve Chair Jerome
Powell last week said the outlook for the U.S. economy is
"remarkably positive," and strategists are quick to note that it
is rare to have a bear market when the economy is expanding. 
    "When you don’t have a recession, typically pullbacks can be
sharp, but they tend to be short,” said Brad McMillan, chief
investment officer for Commonwealth Financial Network in
Waltham, Massachusetts.
    
    HIGHER INTEREST RATES - NO BIG DEAL: The spike in U.S.
Treasury yields spooked stocks but rising rates are less
concerning if they are gradual.             
    "We believe we are in a reflationary environment ... and
hence, rising rates tend to be associated with rising stock
prices," Thomas Lee, Fundstrat's head of research, said in a
note.
    
    MARKET CORRECTIONS - THEY'RE A GOOD THING: Sharp market
pull-backs are viewed positively in the context of a long bull
run because they rid the market of complacent investors and
shake off pricey valuations.
    "You need these periodic cleanses to kind of refresh and
then allow the market to move higher," Carlson said.
    
    THE BUYBACK IS YOUR FRIEND: Some market-watchers have
pointed to a recent "quiet period" preventing corporate stock
buybacks as a potential reason for a lack of support during the
volatility. But companies are expected to keep using their cash
to repurchase their stock, keeping demand for equities high.
Goldman Sachs strategists expect S&P 500 buybacks to climb by 22
percent to $940 billion in 2019.
    Bucky Hellwig, senior vice president at BB&T Wealth
Management, said that buybacks are "sustainable:" "You've got
companies generating a higher level of cash flow based on the
tax cuts that are in effect now, and that cash flow has to go
somewhere."
    
    REASONS TO BE BEARISH:
    EARNINGS - SHAKIER THAN THEY SEEM: After this year's
tax-fueled boost, S&P 500 earnings growth is expected to step
down to 10 percent in 2019. Some investors worry that even that
rate may be too high, given pressures from rising wages and
other increasing costs.             
    "The bull case is predicated on earnings being OK and if we
actually see earnings estimates roll down ... that's a big
risk," said Keith Lerner, chief market strategist with SunTrust
Advisory Services in Atlanta.
        
    THE FED DOES NOT HAVE YOUR BACK: Powell's recent comments
that rates need to continue to move toward an estimated neutral
level and even a bit beyond are a concern for investors who
believe the central bank may increase rates too quickly.
            
    "The Fed could tighten too much, especially given that it is
using two tools at the same time - rate hikes and balance sheet
normalization," said Kristina Hooper, chief global market
strategist at Invesco. "That has the potential to choke economic
growth and create disruption and volatility in the stock
market."
      
    POLITICS - CLOUDS ON THE HORIZON: Investors point to risks
from increasing tensions over trade between the United States
and China, the world's two biggest economies. 
    "The growing tariff wars have the potential to negatively
impact economic growth," Hooper said.
    Turmoil in Washington also creates unease on Wall Street,
and volatility could rise ahead of the November congressional
elections.
    
    BONDS ARE ENTICING: Key to the run in stocks has been their
relative yield advantage over other assets, namely bonds. But
the rise in bond yields means they are increasingly attractive
and may start to lure away investor resources from stocks. 
    "If bond yields start offering competition to equities, then
the favorable case for equities versus bonds is adversely
affected and that is the key thing to watch out for," said Vinay
Pande, head of short-term investment opportunities at UBS Global
Wealth Management.
    
    TECH WRECK: Shares of technology and other Internet-related
companies have led the stock market's ascent to record highs in
recent years, but those shares have particularly suffered in the
recent pullback. 
    If tech continues to stumble, some investors are concerned
that other sectors will fail to pick up the slack in any market
rotation.

 (Reporting by Lewis Krauskopf; Editing by Cynthia Osterman)
  
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