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Chief Investment Officer, Defiance ETFS.
The first half of the year came with the worst stock market decline in half a century. Two years after the Covid-19 virus rocked the markets, investors found themselves contending with a fresh set of issues, including slowing growth and inflation.
There was, and remains, much debate about whether or not we are in a recession. Major indices have been in correction territory or bear market territory for the last quarter. As Nasdaq, S&P and Dow Jones continue to mostly fall with only small rises, should investors buy the dips or sell the rips? What does the future hold?
On one hand, consumer sentiment is at an all-time low. According to a survey by The University of Michigan, the market barometer for consumer confidence gauging, the Consumer Sentiment Index, fell to 50 in June 2022, down from 58.4 in May and below last June’s 85.5.
We saw indiscriminate selling across all sectors and asset classes, and for lack of better words, there was nowhere to hide. All asset classes were in the red, with the exception of oil, gas and energy-related trades. The Energy Select Sector SPDR Fund was up 35.66% in the first half of the year, while West Texas Intermediate was up 74.31% in that same period of time, according to data gathered from my company from Bloomberg Terminal.
According to the same database, major indices like NASDAQ, S&P and Dow were down 30%, 20% and 13% during that same time frame. The average investor has little faith that the economy will have a soft landing. We hit the definition of a technical recession with two negative quarters of GDP in a row. On the other hand, we have sustained earnings, a red hot job market, elevated consumer savings and strong debt service ratios—all signs of a healthy economy.
Therefore, I think the future looks brighter. It is entirely possible that we have seen the market bottom this summer. This doesn’t mean that we can not retest those lows, for it is very difficult to confirm a bottom until we are far removed and discussing it in hindsight.
But I see that investors are beginning to dip their toes back into the market. Earnings showed us that many were able to beat estimates and absorb inflation, as evidenced by strong operating margins and earnings per share. Of the 87% of the companies in the S&P 500 that have reported actual results as of this writing, 75% have reported actual EPS above estimates. The tech generals like Microsoft, Google, Amazon and Apple—the names that led the rally of the last decade—came through again; however, the near-term guidance was spotty, and substantial risks still remain.
Yet when we see the prices of stocks falling as they have in the first half of the year, investors with longer-term outlooks may begin to get comfortable with the idea of dollar-cost averaging some of their favorite stocks, which were far more expensive six months ago. As we see tech and liquidity in tech-related equities rebound, I expect that there may be a larger rotation from value to growth coming our way as well as a longer-term recovery along with the broader market—particularly after the Federal Reserve signals that no more rate hikes coming our way.
While growth is slowing, the U.S. economy is also returning to pre-pandemic levels. Jobs, spending and revenue transitioned to services, a major contributor to GDP. I think a major recession with broad contraction is less likely as the strong labor market momentum continues.
The Fed has hiked 75 basis points on two occasions, and the market has absorbed it. We may see additional hikes; however, inflation will likely begin to budge downwards from its peak. Once the Fed loses steam with rate hikes and we get past the doldrums of summer liquidity, I think it is likely we will continue with strong jobs, stellar earnings and consumers who are spending; we just might see a better year-end.
The economy is moving back to a space of normalcy and reasonable growth. With that comes several opportunities to buy your favorite equities at a reasonable price. While we’ve seen a shorter-term strong bear market rally, the train has certainly not left the station. However, in order to benefit from the future of stock price appreciation, an investor does have to be on that train. According to Investopedia, the annualized return of the S&P 500 averaged 10.5% between 1957 and 2021.
Again, while it is difficult to call the bottom or pick the exact moment where it is safe to invest and experience those L-shaped recoveries, I find it unlikely that investors are getting in too high, especially if they are going for longer-term holding periods. Investing in a bear or market-in-correction market could prove to be particularly beneficial to younger investors who are saving for retirement. It is not often (2020 during the pandemic and 2008 before that) that we get these exaggerated pullbacks which make for interesting entry points. For investors with extra cash on hand that can be locked up for a period of time greater than one year, for example, it could be a great time to buy equities, grow at a reasonable price and hope for price appreciation as the market and economy recover.
Many of us are greedy when prices are ripping and fearful when they are falling. These times when we should take a page from Mr. Buffet’s book and flip the narrative. I encourage others to consider the opportunities in a depressed market for future potential earnings.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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