The first half of 2018 has been a roller-coaster ride for the stock market. A blockbuster beginning was offset by a correction. And now investors look forward to seeing how uncertainties around trade and the midterm elections will play out.
While fear and volatility have kept plenty of investors on the sidelines, analysts at BMO Capital Markets say many are missing the larger picture. They have some reassuring messages that suggest the market should be just fine — at least over the next six months.
Fundamentals remain strong
The economy, after a 9-year expansion, is still in a good shape, according to major economic indicators. Homebuilder sentiment and consumer confidence have risen, while jobless claims and high-yield spreads have declined to historic lows.
Because of cross currents including the tariffs and trade war talk, the stock market has underperformed the economy. As economic fundamentals remain strong, BMO analysts think the underlying momentum could fuel the rise of the equity market.
The yield curve isn’t an imminent concern
This year, the flattening yield curve has caused some concerns, because an inverted yield curve has predicted the past 7 recessions. But history also suggests the market usually takes some time to fully absorb the impact— it has taken about 15 months on average before a bear market to take place following yield curve inversions.
The yield curve as a leading indicator of recession could create a buying opportunity for investors. Even if the yield curve does invert at some point this year, analysts at BMO Capital Markets argue investors shouldn’t view that as an automatic sell signal.
Interruptions could be seasonal
It’s time to review the old saying on Wall Street — “Sell in May and go away.” Trading volume tends to dry up in summer, and the upcoming midterm election in late fall doesn’t help ease investors’ concerns.
BMO’s analysis of the first-term Republican presidents since 1945 shows the stock market performance during first halves tends to be below average compared to Democratic presidents. But stocks typically have bounced back during mid-summer with the S&P 500 finishing the year up almost 10%.
BMO analysts believe the saggy market now is more about seasonal issues rather than substantial concerns.
“We continue to believe the majority of investors are missing several fundamental facts that support higher equity prices due to an overwhelming supply of rhetoric, innuendo, and affinity for negativity,” Brian Belski, Chief Investment Strategist at BMO Capital Market wrote.
Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.