Stack on Stocks: A Cautious Bull

Focus: STOCKS

James Stack Image James Stack President, Stack Financial Management

In historical terms, 2016's healthy 9.5% gain was only mediocre - as over half the Presidential Election years since 1928 had an even greater return, observes James Stack, money manager and editor of InvesTech Research.

Unfortunately, post-election years are often not as friendly for investors. Double-digit losses occur twice as frequently as in election years and the average gain is only 5.2%.

For now, however, the economy is hitting on all cylinders. From large corporations to small companies, confidence has turned sharply higher since the November election, and that portends well for business spending and investment in 2017.

Moreover, any surprises in the business sector over the next few months should come in the form of stronger, rather than weaker, expectations.

Several major leading economic indicators have shaken off recent signs of volatility and weakness, and are now pointing to a continuation of the economic recovery.

Alongside soaring confidence and upturns in other leading economic gauges, our key technical indicators also support a continuation of the bull market over the near-term.

However, the positive economic and technical evidence does not rule out a 5-10% correction sometime in the first half of 2017. Corrections are a natural and healthy part of every bull market as they temper investor expectations and keep exuberance in check.

Stocks are expensive by historical standards, which limits the upside potential for this bull market and increases the downside risk when a bear market does eventually arrive.

The current P/E ratio of the S&P 500 at 25.5 is well above the long-term average of 17.1.