Hesitation about buying this fall in world stocks is real. Whether it’s a concern that the Federal Reserve won’t save a thing or a depth of uncertainty looming overhead, few strategists see even more pain even as they prepare for better days.
Here are a few signs strategists are watching before they start entering after a sharp drop in U.S. markets last week – and a plan on how to do it.
One of the events that ended past cycles of bears was the Federal Reserve’s willingness to inject excess liquidity to support asset prices and boost domestic activity. But Louis Gave of Gavekal Research says in a note that this is unlikely to happen given the inflationary pressures the Fed is struggling with.
“Instead of being a friend of investors, the Fed has become an enemy with the intention of tightening monetary conditions. It can be debated how aggressive it will be, but it is unlikely that the Fed will help soon, ”Gave writes.
According to Gave, the outlook for some of the other factors that have helped end bear markets in the past also looks unlikely, including a collapse in energy prices that could stabilize the stock market, a significant drop in the U.S. dollar or assets becoming so cheap to attract high-value investors.
“Today, unfortunately, it is difficult to find much larger assets that are available at selling prices. This is probably because the bear market is too young and enough pain has yet to be imposed on investors, ”Gave writes.
What could end the bear market? While Gave admits to grabbing the bottom of the barrel of opportunities, it offers three to watch out for: China lifts Covid’s blockades and unleashes a series of incentives to stabilize its economy – a move to boost animal spirits in emerging markets, though also likely to push energy prices to new highs , writes Gave.
Two other events that could calm the markets: A peaceful solution to the Ukrainian-Russian conflict, such as a compromise agreement or a regime change in Moscow, could lower energy prices, which would help stocks. In a similar vein, an agreement that brought U.S. opponents Iran and Venezuela “out of the cold” could lower oil prices and act as a medicine for stocks, Gave says.
Given the likelihood of greater pain for U.S. and global stocks, DataTrek Research co-founder Nicholas Colas told clients in a note that currently the primary goal of investors “should be to get to that point with minimal incremental damage to their portfolios.”
This means avoiding holding stocks or funds traded on a stock exchange that have reached new lows in 52 weeks, instead waiting for prices to equalize for at least one to three months as cheap stocks and sectors tend to fall in price when market values are recalibrated lower , he says.
When should investors consider adding stocks? Here, says Colas Barronova that markets still don’t tend to bottom out in one day – which is why Colas advises investors to buy for little, or the average dollar price, in stocks they like. For those looking for a sign, Colas says, when the CBOE VIX index reaches 36, investors could add a little risk and ease as it approaches 20. It is currently at 32.75.
What to add? Since bottom correlations typically approach 1.0, Colas says bounce tends to benefit almost everyone to some degree, so for those who don’t want to get into weeds owning an index fund is a way to benefit from rejection.
However, stocks that recorded the biggest drop on the way down tend to experience the biggest jumps, Colas says. So that would mean technology, but Colas says it shares technology “whose stories are damaged” like
(NFLX), Meta Platforms
(FB) and possibly
(AMZN) may not be part of that rejection in the same way.
Others like Stephanie
chief investment strategist and portfolio manager at Hightower Advisors, has been advocating a weighty approach for months due to expected market volatility. In practice, this means owning both cyclical and value-oriented companies and quality with strong free cash flow, balance sheets, sound business models and excellent governance.
(SBUX) is one of the companies to which Link added amid the decline, highlighting the strong performance of coffee machines in the U.S. and the $ 20 billion the company must invest in people, stores and products from its canceled share buyback.
Other companies Link favorites:
(AXP), which has market share, is recording new growth since the younger generation of Z and Millennials, and is poised to benefit from a recovery in travel and entertainment.
(SLB) has a hidden technology story embedded in an energy company that can help generate double-digit earnings growth, she says. In addition, it has just increased its dividend by 40%.
Write to Reshma Kapadia at [email protected]