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5 reasons why the market won't crash

July 22, 2014: 1:23 PM ET
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Market bears point to many reasons why stocks should plunge. But the bulls have knocked them down one by one.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

There has been a lot of talk about how this bull market is starting to look like 2007, 2000 or -- gasp! – 1929. Forget a 10% correction. The market is destined for a crash!

But these uber-bears (Bears driving taxis? Now there's a thought) may be dead wrong.

Instead of highlighting all the things that are destined to go wrong because stocks are near all-time highs, it might be more appropriate to compare this to the glory days of 1982-2000 or 1949-1968: two of the longest bull markets in history. Read the next sentences like the narrator in ESPN's "30 for 30" commercials.

What if I told you this is only the beginning of a great run for stocks which may last another dozen years? And that while the bull may be aging, it's -- like Jake LaMotta -- still raging?

Here are 5 reasons why the market is not going to crash ... and you shouldn't bail.

1. No recession in sight. Bear markets often occur around the same time as severe economic downturns. The 2008 credit crisis. The 2001 recession following the dot-com meltdown. The oil shock of the mid-1970s.

There aren't any signs pointing to a recession now. The U.S. economy has pretty much plodded along for the past four years. Yes, it's a frustratingly weak recovery. I've called it the low and slow barbecue recovery since 2010. But it's still a recovery.

Related: Why you are more likely to get a raise

Jonathan Golub, chief U.S. market strategist with RBC Capital Markets, wrote in a report Monday that there are six indicators (a mix of jobs, housing, manufacturing, inflation and market data) he follows which tend to go south right before a recession. None of them are currently.

2. The Fed is still your friend. The risk of the Federal Reserve crashing the stock market with huge interest rate hikes is virtually non-existent.

It's painfully clear to investors that the Fed will start raising rates next year.

The Fed's key rate has been near zero since December 2008. So even if the Fed pushes it back towards 1% next year, that's not cripplingly high. And market experts said investors will be ready for rate hikes since Fed chair Janet Yellen will go out of her way to foreshadow them in speeches and Fed policy statements.

"It's all about telegraphing. If you know the rules, you can play the game," said John Norris, managing director with Oakworth Capital Bank.

What's more, those first few rate hikes should be viewed as a positive sign. The Fed will only boost rates once it is confident the economy is picking up a little more steam.

"If the Fed is tightening because corporate revenues are growing and the economy is better, that's not a bad thing," said Carl Tannenbaum, chief economist with Northern Trust.

3. Sentiment still skittish. Sure, the S&P 500 hit another all-time high on Tuesday. So much for those Gaza and Ukraine fears, huh?

Not so fast. There is still a lingering sense of nervousness.

"Market sentiment at the top is typically a lot more bullish. We're not there yet. It only feels toppy," said Brendan Connaughton, chief investment officer with ClearPath Capital Partners.

CNNMoney's Fear and Greed Index, which tracks the VIX (VIX) volatility gauge and six other indicators of sentiment, is back in Fear mode. It was showing Extreme Greed signs just a month ago.

fearandgreed0722

Volatility has returned this year. Before Ukraine and Israel, the market fretted about the so-called Fragile 5 emerging markets.

This might actually be a good thing.

Related: 6 events that spooked the markets this year

When investors don't worry about anything at all, that's when you have to be concerned about complacency and bubbles. Investors now seem to have more reasonable expectations.

"There are question marks for the market," Norris said. "The easy money has been made. I don't see 30% gains on top of last year. But you don't want to develop a bunker mentality either."

4. Market isn't cheap but isn't crazy overvalued either. Stocks are not amazing bargains anymore.

The S&P 500 is currently trading at 15 times 2015 earnings estimates -- roughly in line with what many strategists view as fair or full value for the market.

Related: No discounts here. 5 expensive stocks

But Connaughton notes that you "can't look at valuations in a vacuum." According to estimates from FactSet, Wall Street is predicting earnings per share growth of 12% in 2015. The S&P 500's average dividend yield is about 2% too.

Related: 7 'cheap' stocks in the S&P 500

So if you believe that a total return for the market should roughly correspond with earnings growth and income from dividends (in this case, 14%), then a price-to-earnings ratio of 15 is not frothy in the least.

5. Corrections have happened in this bull market. One of the biggest arguments the bears make about this market is that there hasn't been a big pullback in a while. Golub (who is not bearish) noted that it's been more than 1,000 days since the last correction. That is true.

It sure does feel like the market has done nothing but go up, up and away like Superman in the past five-plus years.

But a closer look shows there have been two (almost three) corrections already in the past five years.

The first was in the spring of 2010. Remember the infamous Flash Crash and fears about Greece leaving the Eurozone fears?

The second was the spring and summer of 2011 as debt ceiling concerns culminated in Standard & Poor's stripping the U.S. of its prized triple-A credit rating.

And even though it's technically, uhh, correct, to say there has been no correction in nearly three years, Connaughton reminded me that the market did have another near correction in 2012. Stocks fell 9.94% between April 2 and June 1 of that year. You can be a stickler for the rules and declare that 9.94% is not 10%. But that's really silly.

So there have been interruptions to this recent bull run. There will probably be more.

"It's normal to have a correction in any bull market. There tends to be some volatility," said Stephen Wood, chief market strategist at Russell Investments.

But unless a pullback is due to legitimate concerns that the economy and earnings growth are tanking, investors will probably keep doing what they have done for the past five years and counting: go shopping.

"This is a market that has buy on the dip deeply embedded in its psyche," said Quincy Krosby, a market strategist at Prudential Financial.

In other words, buying and holding may be the best strategy.

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    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

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