The U.S. stock market sell-off earlier this week could be transitory, and investors should expect major indices to resume their climb, experts have said.
The major indices fell sharply on Monday and Tuesday, with the Dow falling more than 500 points during the two sessions. On Wednesday, they opened higher, reversed to negative territory, and pared losses when the closing bell rang.
People have been talking about the U.S. stock market having a correction in 2018, and some feared the sell-off this week could be a start. However, expert said it's not yet time to worry about U.S. equities.
"We view this week's equities market sell-off as a transitory reckoning on the part of some investors who question the rationality of high valuations, but we expect major indices to resume their climb, albeit at a somewhat more subdued pace," said Humberto Garcia, head of Global Asset Allocation for Bank Leumi USA.
Part of the nervousness U.S. equities caused in the past few days came after the benchmark U.S. Treasury yield reached levels not seen in almost four years. It also came as the U.S. Federal Reserve changed its years-long accommodative policy and opted for a more tightened one.
Rising bond yields are traditionally seen as bad for stocks as it means large companies will have to spend more to finance their debts as interest rates increase.
However, analysts at major investment banks such as Morgan Stanley said that yields have more room to run higher and it will seriously affect the stock market if yields on the 10-year U.S. Treasury break above 3 percent.
"We do not expect a substitution effect favoring bonds to kick in over the near term," Garcia told Xinhua.
"The equity market's momentum, buttressed by the recent passage of business-friendly tax reform and the resulting boost to corporate earnings, should overcome the gradual increase in the U.S. Fed funds rate," he added
U.S. President Donald Trump signed a 1.5-trillion-dollar tax cut bill into law in December 2017, which became effective from January 2018.
The tax bill, a sweeping rewrite of U.S. tax law since 1986, cut the corporate income tax rate to 21 percent from 35 percent and lowered individual income rates.
The four-quarter corporate earnings reports have been positive so far. Of the S&P 500 companies that had reported as of Tuesday morning, 80 percent posted better-than-expected earnings, while 81 percent beat top-line estimates, according to Reuters.
The Fed on Wednesday kept its benchmark interest rate unchanged in a 1.25 to 1.5 percent range after its two-day meeting, while giving an upbeat assessment of the recent U.S. economic growth.
"Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low," the Fed's policy-making committee said in a statement.
The Fed also expected U.S. inflation on a 12-month basis to move up and to stabilize around its 2-percent target over the medium term.
"Today's Fed statement implies that it does not expect inflation to reach 2 percent this year. ... This view suggests a low likelihood that the Fed accelerates its rate hikes and boosts yields enough to be competitive with equities returns," Garcia said.
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