Normally, when certain stock market sectors are flying high, it’s not a good idea to buy in. Tried and true investing wisdom generally holds that hot stocks probably won’t be hot for long.
That’s because of the statistical principle of reversion to the mean: A stock’s performance in the near future is much more likely to resemble its long-term past average than its recent past.
By this logic, buying shares of companies in the already overvalued sectors of tech, industrials, financials and health care might not seem like a smart move.
But there are some good reasons to ignore this classic wisdom—at least until early next year. The reasons are:
1. To please their boards, fund managers make sure they have abundant shares of the year’s winners in their portfolios, regardless of any signs of trouble around the bend. Even if they’re buying late in the year, these managers want to look sharp by having these sectors in their funds. Huge inflows of investment dollars to high-performing sectors result from this corporate window dressing, propelling values. Moreover, managers are especially averse to owning the year’s weaker performers, such as energy, around this time of year. As a result, the likely scenario for the rest of 2017 is strong sectors getting stronger and the weak getting punished.
2. Sustained low interest rates and rising employment are boosting corporate earnings domestically, spurring growth. Meanwhile, vastly improving economies around the world, especially in Europe, are fueling U.S. as well as foreign markets. These positive global economic conditions will likely continue to benefit most of the domestic stock market for at least a few more months, if not years.
3. Chicken Littles like to talk these days about Black Monday — the crash of Oct. 19, 1987, when the Dow Jones Industrial Average fell nearly 23 percent. Yet the market today is completely different. For one thing, economic conditions are far different, with interest rates a small fraction of the nose-bleed rates of the late 1980s. In the days before the 1987 crash, the S&P 500 had been declining substantially, but that hasn’t been happening lately. Instead, we’ve had meteoric ascent. However, now that we’re more than 100 months into a bull market, a market correction (a drop of 10 percent) could easily occur. But there’s lots of money to be made while awaiting corrections, especially widely spaced ones.
4. The widely-anticipated corporate tax cut may already be baked into share prices, and the market seems relatively patient about exactly when it would come, as values haven’t fallen over indications that legislation might not pass until next year.
For all these reasons, the current bull market will probably continue to run hard into the new year.
Any opinions expressed in this column are solely those of the author.
Dave Sheaff Gilreath is a founding principal of Sheaff Brock Investment Advisors LLC. He has more than 30 years of experience in the financial services industry.
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