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You can stop panicking about the stock market now

6 reasons to think your fears about a stock-market crash are overblown


For a while there, it looked ugly on Wall Street as stocks were in a tailspin and big momentum plays were breaking down.

Thankfully, it appears the worst is over.

I know. Here’s where you say that those are famous last words — and I’m sure that between when I file this with an editor and when you read it, the S&P 500SPX, +0.07% will be 50 points in the red and the comments section will be full of colorful discussion about this call.

Here’s the thing: Markets have good days and bad days, and we are hard-wired to give the bad days more attention. This concept won Daniel Kahneman a Nobel Prize in economics, as he illustrated that losses hurt far more than gains feel good — something that many investors have personally experienced.

So while the losses you experienced in August were real and significant challenges are ahead, take a deep breath the next time you hear that little voice telling you to go to cash and try to think rationally. Your fear of losses may be clouding your judgment.

The cyclically adjusted price-to-earnings ratio for the S&P 500 is below its 25-year average.

To prove it to you, here are a few misconceptions about the market — and why your fears of a crash may be overblown:

S&P Is Not Overvalued: As is typical, the latest quarterly roundup provided by the folks at J.P. Morgan Chase was full of great insights. And one grouping of data that was particularly interesting to me was a look at common valuation measures for the S&P 500 — including forward P/E, CAPE, price/book and price/cash flow. You might be surprised to learn that all four of these metrics are below their 25-year averages. In fact, the only key metric that’s above its 25-year average is dividend yield — with the S&P currently offering 2.5% in dividends vs. an average of 2.1%.

Headwinds of a Strong Dollar Are Exaggerated: Over the past year, the U.S. dollar index DXY, -0.08% is up a dramatic 13% as the dollar continues to trade for a big premium over other currencies. This has undoubtedly created a headwind for U.S. corporations in terms of unfavorable exchange rates to multinationals doing business. And while it’s true that the dollar index is down from its March highs, it remains stubbornly elevated from the typical range of the past few years.

This unfavorable year-over-year comparison will continue to act as an anchor on earnings for another quarter or two. But the good news is that once these high-dollar results are baked in, the overall picture will improve dramatically for many stocks.

Pain in Energy Is Overstated: It’s often seen as an excuse to blame the poor earnings performance of the S&P 500 on energy stocks. But while the decline in oil and gas stocks is very real, it’s also important to note that their specific problems are not shared by the rest of the market. Consider the latest FactSet Earnings Insight report that indicates an estimate earnings decline of more than 64% for the energy sector.

No wonder the S&P at large is seeing earnings pressure! Compare that with telecom, which is expected to see a nearly 18% jump in earnings, or consumer discretionary stocks that are projecting a 10%-plus rise in earnings. There are challenges in this market, particularly for energy stocks, but there is also opportunity if you know where to look.

Crashes Are Not Becoming the Norm: We admittedly had a wake-up call for investors after the market suffered its first technical correction with a pullback of more than 10% in August. However, most of 2015 has been characterized by stability, and big declines have been quite uncommon. Consider that even including August’s mayhem, we’ve seen just three declines of 5% or more this calendar year. Compare that with 2008, where we saw two dozen pullbacks of 5% or more as the market melted down, or 10 declines of 5% or greater in 2011, amid the European debt crisis and the domestic debt-ceiling shenanigans.

Neither Is Volatility: The VIX VIX, -1.95% – also known as the “fear index” that is a gauge of volatility at large — is back below 20 after the stress of the past few weeks and the start of another high-stakes earnings season. It’s the first dip below that threshold since Aug. 20, and is not outside other periods of modest uncertainty in the market, including October 2014 and January 2015 — two periods when investors similarly were biting their nails and worried that the party was over.

An Intrayear Decline Isn’t a Death Knell: Another great tidbit from the JPM report is the look at the last few decades, juxtaposing the worst intrayear declines with the total return on the last 35 calendar years.

Most recently, consider 2012, when the market dipped 10% but rallied 13% on the year, or 2013, when the market looked doomed with a 19% loss intrayear but a full-year performance that was basically flat. If you want to look back further, check out 2003, which saw a 14% intrayear decline but a 26% gain on the calendar year, or 1997, which saw an 11% decline intrayear but 31% returns by Dec. 31.

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