Investors might want to use the weekend to keep a few things in perspective after a brutal week for the markets.
The U.S. equity market has endured several bouts of violent swings this week, with the S&P 500 falling 10% from its Jan. 26 peek by the end of Thursday's session. News flow has continued to be ugly. Obscure products that bet against volatility have blown up, bond yields remain on the rise and good news on the economy is being viewed as bad news for stocks.
Despite the whiplash, investors may want to consider not making any wholesale changes to their portfolio.
"Absent a broad and sustained deterioration of financial conditions, we think the U.S. economy will brush off this recent move in equities," writes Bank of America Merrill Lynch economist Michelle Meyer.
Here are several reasons Meyer remains upbeat on stocks.
Economy Is Fine
"The sell-off in the equity market has not been supported by a fundamental change in the economy," Meyer says. The economist points to strong jobs numbers, robust consumer confidence and cycle highs on the ISM index.
If we were headed for a bear market, the economic data would look increasingly worse.
Not Much Panic, Yet
The selloff in stocks isn't spreading to other asset classes yet.
"While the VIX spiked for U.S. equities, we did not see the same in rates, foreign exchange or gold," says Meyer. "It appears that the pullback in U.S. equities is a removal of froth in a particular market and not a sign of broad-based risk-off."
We would add that many big-cap stocks that had been on fire during the market melt-up in January continue to hold firm. For example, Boeing (BA - Get Report) has only fallen 1.5% this week. Action Alerts Plus holding Nvidia (NVDA - Get Report) shares surged as much as 10% Friday following an upbeat earnings report.
Thanks Fed Officials
Fed officials like New York Fed Chief Bill Dudley have made headlines with their comments on markets this week. But, they haven't been overly bearish.
"The Fed does not respond to short-term swings in markets but only to sustained moves, which would threaten to filter back into the real economy -- commentary from Fed officials this week has been dismissive," notes Meyer.
Gold prices are stagnant. Here's why.