It was a nasty week for investors long the U.S. stock market. Major equity market indices were down between -1% and -1.4%. Meanwhile, the Nasdaq is down -1.8% from its early April all-time high. The Russell 2000 is off -4.6% from its late February high.
Don't hyperventilate. Corrections happen. That's why, as stocks hit all-time highs, we had been telling subscribers to raise cash.
U.S. Stocks Down... What now?
The question of what to do next has everything to do with what you think about the U.S. economy. Is the epic rally to all-time highs underpinned by a durable U.S. economic recovery? Or is the immediate-term correction the start of a bear market?
We say U.S. growth is accelerating. U.S. Retail Sales reported last week for the month of March were up 5.5% year-over-year. That's almost a 5-year high.
Meanwhile, the Consumer Price Index (CPI) slowed from 2.74% year-over-year in February to 2.38% in March. Lower inflation isn't a bad thing, Hedgeye CEO Keith McCullough points out in today's Early Look, falling inflation is actually positive for U.S. economic growth. "As inflation deflates, this thing called the GDP Deflator falls, and real GDP accelerates," he writes. (In layman's terms, inflation is subtracted from GDP growth.)
Remember, U.S. economic growth fell from 3.3% year-over-year in the first quarter of 2015 to 1.3% in the second quarter of 2016. After bottoming out, growth is rebounding once again. Fourth quarter 2016 U.S. GDP growth came in at 2.0% year-over-year.
In light of accelerating U.S. economic growth, we say buy the stock market dip.
Despite the modest selloff in stocks...
The market has been pricing in accelerating economic growth for some time now. Take a look at the Chart of the Day below with key callouts from last week's worst performing US Equity Style Factors. Importantly, we last week's market moves in the context of the six-month trend:
- High Beta Stocks (the stocks that move the most when the broader stock market heads higher) were down -2.4% versus +13.3% in the last 6 months
- Top 25% Sales Growth Stocks corrected -1.6% versus +10.6% in the last 6 months
- Top 25% EPS Growth Stocks corrected -1.7% versus +10.9% in the last 6 months
*Mean performance of Top Quintile vs. Bottom Quintile, S&P 500 Companies
Now, here are the returns for the broader U.S. stock market over the last 6 months:
- Nasdaq = +11.3%
- Russell = +11.0%
- S&P 500 = +9.2%
In other words, we think the market has this right. The modest selloff recently is a headfake within a durable bullish trend that's backstopped by an accelerating U.S. economy.
