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Some strategists see more pain ahead for global equities, even as they plan for better days.
Dream time
The hesitation to buy this dive in global equities is real. Whether it’s the worry that the Federal Reserve won’t save the day or the depth of uncertainty looming over them, several strategists see more pain ahead, even as they prepare for better days.
Here are some signs strategists are watching before wading in after the sharp declines in US markets last week – and a plan to do so.
One of the developments that ended bear cycles of the past has been the Federal Reserve’s willingness to inject a lot of excess liquidity to support asset prices and bolster domestic activity. But Louis Gave of Gavekal Research in a note says this is: probably not going to happen given the inflationary pressures the Fed is grappling with.
“Instead of being a friend to investors, the Fed has become an enemy seeking to tighten monetary conditions. You can debate how aggressive it will be, but the Fed is unlikely to help anytime soon,” Gave wrote.
The prospect of some of the other factors that have helped end bear markets in the past also seems unlikely, Gave said, including a collapse in energy prices that could stabilize the stock market, a meaningful decline in the US dollar or assets that become so cheap that it attracts deep value investors.
“Nowadays, unfortunately, it is difficult to find many important assets that are available at fire sale prices. This is probably because the developing bear market is too young and has yet to hurt investors enough,” Gave writes.
What could end the bear market? While Gave acknowledges it is scraping the bottom of the barrel of possibility, he offers three to look forward to: China ends its Covid lockdowns and unleash a raft incentive to stabilize the economy— a move that would boost the animal spirit in emerging markets, but also likely push energy prices to new heights, Gave writes.
Two other developments that could calm the markets: a peaceful solution to the conflict between Ukraine and Russia, such as a compromise agreement or a regime change in Moscow, could depress energy prices, benefiting stocks. On a similar front, a deal that brought US opponents Iran and Venezuela “from the cold” could lower the price of oil and act as a salve for stocks, Gave says.
With probably more pain for US and global stocks, DataTrek Research co-founder Nicholas Colas told clients in a note that the primary goal of investors right now “should be to get to that point with a minimum of incremental damage to their portfolios.” .”
That means avoiding holding stocks or exchange-traded funds that have hit new 52-week lows, and instead waiting for prices to stabilize for at least one to three months, as cheap stocks and sectors tend to be cheaper. when market valuations are recalibrated lower. , he says.
When Should Investors Consider Adding Stocks? Here, says Colas Barron’s however, that markets don’t tend to bottom out in one day — one reason Colas recommends investors buy little by little, or dollar average, in the stocks they like. For those looking for a sign, Colas says when the… CBOE VIX Index hits 36, investors may want to add some risk and lighten up as it gets closer to 20. It currently stands at 32.75.
What to add? Since correlations tend to approach 1.0 on a bottom, Colas says an uptick tends to benefit almost everything to some degree, so for those who don’t want to get in the weeds, owning it is of an index fund is a way to profit from a bounce.
That said, the stocks that took the biggest hits on the way down tend to make the biggest jumps, Colas says. So that would mean technology but Colas says technology stocks “whose stories have been damaged” Like it
Netflix (NFLX), Meta Platforms
facebook (FB) and possibly
Amazon.com (AMZN) may not be part of that bounce in the same way.
Others like Stephanie
Clutch† chief investment strategist and portfolio manager at Hightower Advisors, has been advocating a barbell approach for months due to the expected volatility in the market. In practice, that means owning both cyclical and value-oriented companies and quality with strong free cash flow, balance sheets, solid business models and excellent management.
Starbucks (SBUX) is one of the companies Link added to amid the declines, noting that the coffee maker strong results in the US and the $20 billion the company must invest in people, stores and products from the canceled share buyback.
Other companies that prefer Link:
American Express (AXP), which is gaining market share, seeing new growth from younger Gen Z and millennials, and poised to capitalize on a recovery in travel and entertainment.
Schlumberger (SLB) has a hidden technology story embedded in the energy company that could help drive double-digit earnings growth, she says. In addition, the net increased its dividend by 40%.
Write to Reshma Kapadia on reshma.kapadia@barrons.com
