Investors Unsure When to Dive Back Into U.S. Stocks
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(Bloomberg) — The pause in the stock market’s strong start to 2023 underscores the main question vexing much of Wall Street: When will it be safe to start buying again?
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Yes, the markets are more confident that the Federal Reserve will soon stop the vicious cycle of interest-rate increases that saw the S&P 500 index suffer its worst fall since 2008. However, higher rates could cause a recession and slow down any growth.
It is difficult to position yourself for this financial yin and yang.
“The S&P 500 has never bottomed before the start of a recession, but it’s not clear yet whether the US economy will actually fall into a downturn,” According to Ed Clissold (chief US strategist at Ned Davis Research), there is a 75% chance of the US going into an economic slowdown during the first half 2023. “Some indicators are telling us that a soft landing isn’t off the table. All of these cross currents do make it challenging for investors to position in US stocks.”
These cross currents could cause the stock market to be choppy as investors rely on economic data from the incoming and look at historical trends for clues. The S&P 500 lost 0.7% last week, ending a 2-week winning streak. However, the index rose 1.9% Friday thanks to an increase in tech stocks and Fed officials easing fears about overly aggressive policy moves. Tech-heavy Nasdaq 100 Index posted 0.7% gains for the week, its best day since Nov.30.
Clissold explained that historical performance can help you decide where to invest during a downturn. The six months prior to a recession, those that peak at the end of economic cycles, such as industrial companies and materials producers, are often strong. The same applies to consumer-staples, as well health-care stock.
The same time, stocks of rate-sensitive industries such as financials, realty, and growth-oriented technologies tend to lag in that period.
The problem is the scope of last year’s selloff makes historical comparisons difficult to use. In fact, last year’s big losers — like rate-sensitive tech and communications services stocks — are among the best performers this year, leaving investors wondering if the worst of the bear market decline is behind them.
The markets will review earnings results from Microsoft Corp. (Tesla Inc.), International Business Machines Corp., and International Business Machines Corp. in the coming weeks. These earnings are likely to influence the direction of equities. The Commerce Department will also release on Thursday its fourth quarter US gross domestic product estimate. This is expected to show an acceleration.
Mark Newton, Fundstrat Global Advisors’ head of technical strategy, believes the S&P 500 reached its bottom in October. And he thinks it’s premature to completely write off beaten-down technology stocks.
“I’m optimistic on US equities this year, but the biggest risk for stocks is if the Fed over hikes,” Newton is currently monitoring whether the S&P 500 can maintain its December lows of around 3,800. “Earnings this week from tech companies could be a huge catalyst. Other corners of the market are stabilizing. But if tech falls really hard, that’s a problem and the market won’t be able to broadly rally.”
Bloomberg has surveyed forecasters who predict that the economy will contract during the second and third quarters.
While that would meet one standard definition of a recession, since 1979 the official arbiter — the National Bureau of Economic Research — hasn’t declared that such a contraction was underway until an average of 234 days after it started, data compiled by Bloomberg Intelligence show. So don’t hold your breath for a warning.
The stock market is more likely to indicate when a recession will start and end than the government. According to data from CFRA, equity prices are a good indicator of the likelihood of a recession starting seven months prior to it beginning and ending five months after it ends.
“The S&P 500 may bounce back well before the announcement, as stocks typically rapidly price recessions,” Gillian Wolff, Senior Associate Analyst at Bloomberg Intelligence.
While the S&P 500 has priced in an earnings decline, higher borrowing costs and persistent economic uncertainty will likely hold back gains in stocks over the next year, according to Bloomberg Intelligence’s fair-value model. BI’s base-case scenario puts the index around 3,977 at the end of 2023 — roughly unchanged from where it closed Friday. However, BI projects that the bullish scenario will see it reach 4,896, a 23% gain.
Chief executive officer at 180 Degree Capital, Kevin Rendino, believes that the US recession is already underway. He’s been snapping up shares of small-cap stocks, specifically technology and discretionary shares that he sees at extremely low valuations.
The history of small-cap stocks shows that they are among the first to bottom before the larger market rises. The Russell 2000 is up 6% in January, outpacing the big-cap S&P 500’s 3.5% gain.
“While everyone is running away, I’m running toward those hammered small-cap stocks,” Rendino said. “They’ll be the first to discount a recovery, and they’re already starting to do that relative to large caps. Investors are anticipating a recession, but whether we’re in one or not, we’re not headed for Armageddon.”
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