Why we shouldn’t be wringing our hands over this stock market

  • Jan. 1: up 5.3 percent
  • Feb. 1: up 0.7 percent
  • Feb. 15: down 0.5 percent
  • Today: down 1.3 percent

Source: Refinitiv

“While EPS estimates have gone lower, they have not fallen nearly as much as feared,” Nick Raich, who follows corporate earnings at Earnings Scout, told clients on Thursday.

There is a good chance the much-feared “earnings recession” will not begin in the first quarter. That is a term that describes two consecutive quarters when earnings decline over the prior year quarter.

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Also, do not underestimate the power of central banks. We had the Fed pivot in December to less aggressive stance. And on Thursday we had the European Central Bank make the same move with President Mario Draghi leaving rates unchanged, dramatically downgrading Eurozone growth prospects and launching another lending program offering cheap money to banks.

Finally, maybe it’s time we all got more reasonable with future expectations in the stock market. With the S&P up nearly 10 percent this year, investors have become used to the idea of an endless up spiral in the next decade. Maybe it’s time to temper that.

The current bull market turns 10 years old at Friday’s close. At Wednesday’s close the S&P’s 10-year annualized return was a whopping 17.5 percent, the best since early-2001, according to Advisor Investments. That is way above the historic returns of about 7 percent a year.

This is why everyone from Vanguard on down have been saying to temper forward expectations. In a recent interview with CNBC, Vanguard CIO Greg Davis told me the firm’s expectations for U.S. equity market returns are lower for the next 10 years.

“If we look forward for the next 10 years, our expectations around U.S. equity markets is for about a 5 percent median annualized return,” he told CNBC on Feb. 11. “Five years ago, we’d have been somewhere in around 8 percent.”

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