So far, 2022 has been a turbulent year for equities. With fears of inflation and Fed intervention, the S&P 500 has shed about 6%. But not everyone is worried. Analysts at Goldman Sachs believe the market will end the year up. Which begs the question: If stock market fears are overblown, should we buy the dip?
The stock market has taken a few tumbles already this year. It’s sure to take a few more. Inflation in January was at a startling 7.5%, and things will probably continue that way for a few more months. However, by summer, inflation should slow down.
Comparisons to the Fed’s late 70s and early 80s inflation-fighting rate hikes are faulty for several reasons. Demand shock is falling, and supply chain problems are fixable. In addition, productivity is high, and the impact of stimulus money is easing off. In short, the situations are distinct.
Fed Rate Hikes in March
Minutes from the last Fed meeting suggest they’ll hike interest rates in March. An official announcement could see investors rotate out of riskier assets and herald a market correction. But even if it leads to a crash, investors with the right approach shouldn’t worry. As long as you don’t invest with money you need tomorrow, you can ride out the storm.
If the market does crash, there are a few dangers out there. Most notably, the amount of leverage hidden in investment funds and shadow banks is unclear. Hedge funds, money market funds, and property trust borrowings and liabilities have increased by 11% (to 43%) over the last decade. If assets drop, other markets could collapse.
Should We Buy The Dip?
Not everyone is confident that the market will rally in 2022. A quick look at P/E ratios suggests that equities are expensive. Furthermore, the Fed’s accommodative monetary policies have played a part in this growth. If they tighten monetary policy, these same conditions won’t exist, making a similar rally less likely.
Opinions on Wall Street are mixed. Since the pandemic, buying the dip has been a winning strategy; however, with more interest rate hikes throughout the year, investors find it challenging to stay optimistic.
Other investors see this situation as an opportunity. Bill Ackman’s Pershing Square snapped up Netflix stock after it had dropped almost 50% from November’s highs. Ackman has suggested that many of his best investments come when investors with short-term horizons drop equities with significant future potential.
Similarly, Ark Capitals Cathy Woods — whose Ark Innovation ETF is down around 25% YTD — has declared that “innovation is on sale.”
The fact remains that stocks haven’t looked this cheap since the start of the pandemic. But future earnings don’t look as attractive in a market with high inflation and rising interest rates.
Tech stocks have suffered considerably this year, most notably Meta Platforms Inc. (nee Facebook), which is down about 35%. However, some value stocks are up. For example, Exxon Mobil (+31%) and Bank of America (7.7%) have performed strongly.
Much of the market’s potential to rally relies on whether investors stay optimistic in the face of corrections. Some experts suggest that newer investors who’ve only ever known a bull market won’t have the tenacity to stay in the market or buy the dips. However, data from Bank of America suggest that retail and institutional investors are speculating heavily.
One factor worth considering is the amount of liquidity in the market. Liquidity is at its highest level in 30 years. Lisa Shalett, CIO of Morgan Stanley Wealth Management, warned that these levels could mask rising risks. She stated that currently, equities aren’t reflecting the new reality of tightening monetary policy.
With all the uncertainty in the air, blindly buying the dip is a risky strategy. High valuation and stubborn inflation levels are making growth stocks seem unattractive. However, companies with solid fundamentals are still a good bet.
It seems that 2022 is going to be a stock-pickers market. There are still some interesting bargains to be found.
Some stocks to consider are:
Meta, Facebook’s parent company, is down 36% YTD. However, they are still posting solid profit and revenue growth. If investors have overreacted to Facebook’s pivot into the Metaverse, this could be an excellent long-term option.
As semiconductor supply chain issues ease, companies like Applied Materials and Analog Devices could rally. They’re definitely two to watch.
And finally, Goldman Sachs dropped by about 8% when they released company earnings figures. However, their current price could look cheap with more mergers and IPOs expected during 2022.
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Alpesh Patel OBE