The hesitation to buy this drop in global equities is real. Whether it’s concern that the Federal Reserve won’t save the day or the depth of uncertainty looming, several strategists see more pain ahead even as they prepare for better days. .
Here are some signs strategists are watching for before they start wading after the sharp declines in US markets last week – and a plan to get there.
One of the developments that ended past bear cycles was the Federal Reserve’s willingness to inject tons of excess liquidity to support asset prices and support domestic activity. But Louis Gave of Gavekal Research in a note says that is unlikely to happen given the inflationary pressures the Fed is grappling with.
“Rather than being a friend to investors, the Fed has become an enemy determined to tighten monetary conditions. Its aggressiveness is debatable, but the Fed is unlikely to help soon,” writes Gave.
The prospect of some of the other factors that have helped end bear markets in the past also doesn’t seem likely, according to Gave, including a crash in energy prices that could stabilize the stock market, a significant drop in the US dollar or assets that become so cheap that they attract high-value investors.
“Today, unfortunately, it is difficult to find many major assets available at bargain prices. This is likely because the ongoing bear market is too young and has not yet imposed enough pain on investors,” writes Gave.
What could end the bear market? While Gave acknowledges he’s scratching the bottom of the barrel of possibilities, he offers three to watch: China ends its Covid lockdowns and triggers a series of stimulus measures to stabilize its economy – a move that would boost spirits animals in emerging markets, but also likely to drive energy prices to new highs, writes Gave.
Two other developments that could soothe markets: A peaceful resolution to the Ukraine-Russia conflict, such as a compromise deal or regime change in Moscow, could lower energy prices and help equities. On a similar front, a deal that brought U.S. adversaries Iran and Venezuela back “from the cold” could lower oil prices and act as a balm for equities, Gave said.
With more pain likely for U.S. and global equities, DataTrek Research co-founder Nicholas Colas told clients in a note that the main focus for investors right now “should be to get to this point. with minimal further damage to their wallets”.
This means avoiding holding stocks or exchange-traded funds that have hit new 52-week lows, instead waiting for prices to stabilize for at least one to three months, as cheap stocks and sectors tend to become cheaper when market valuations are recalibrated downwards. , he says.
When should investors consider adding stocks? Here, Colas tells Barrons that markets don’t tend to bottom out in a day, which is why Colas recommends investors buy small, small, or average dollar amounts of stocks they like. For those looking for a sign, Colas says that when the CBOE VIX index hits 36, investors may want to add some risk and lighten up as it gets closer to 20. It’s currently at 32, 75.
What to add? Since correlations tend to approach 1.0 at the lows, Colas says a bounce tends to profit just about everything to some degree, so for those who don’t want to get into the weeds , owning an index fund is one way to benefit from a rebound.
That said, stocks that have been hit hardest on the downside tend to see the biggest rebounds, Colas says. So that would mean tech, but Colas says tech stocks “whose stories have been damaged” like
(NFLX), the meta-platform
(FB) and possibly
(AMZN) may not be part of this rebound in the same way.
Others like Stephanie
chief investment strategist and portfolio manager at Hightower Advisors, has been advocating a dumbbell approach for months due to expected market volatility. In practice, this means owning both cyclical and value-oriented, quality companies with strong free cash flow, balance sheets, strong business models and excellent management.
(SBUX) is one of the companies Link added to amid the declines, noting the coffee maker’s strong results in the US and the $20 billion the company needs to invest in people, stores and products through upon its canceled share repurchase.
Other companies Link promotes:
(AXP), which is taking market share, is seeing further growth from young Gen Z and millennials, and is poised to benefit from a recovery in travel and entertainment.
(SLB) has a hidden technology story embedded in the energy company that can help drive double-digit earnings growth, she says. Moreover, it has just increased its dividend by 40%.
Write to Reshma Kapadia at [email protected]