A recession? Don’t tell that to the stock market. The major averages ended positive for the week. That came after the best month for the S&P 500 (^GSPC) since November 2020.
Granted, the Nasdaq Composite (^IXIC) is still 20% down year-to-date, and the S&P 500 is 13% in the red. But the recent rally in the markets has some investors wondering if we’re watching a turning point, and if it’s safe to buy.
In continuation of our series “What to do in a bear market,” Yahoo Finance asked the experts.
Have the markets bottomed?
Permabull Tom Lee, co-founder and head of research at Fundstrat recently told investors “the 2022 bear market is over.” He argues the markets could hit new highs before the end of the year.
Meanwhile Rich Ross, Evercore ISI Senior Managing Director says we may be looking at a cyclical bull market.
“Look, I’m not saying today is day one of the next great secular bull market. But I’m telling you that we are probably in a cyclical bull market now,” said Ross.
“The bear market that commenced back in January, February on an index level, is over. The lows are in. And we should now be buying dips rather than selling rips, as has been the case for the last six months,” he added.
“When you think about an S&P that peaked around 4,800, I think 4,600 is a realistic upside target. I think 15 and change on the Nasdaq 100 (^NDX) is a realistic upside target. Those are levels, that are worth playing for,” he added.
Others are calling the recent rise a bear market rally, or bounce.
“I think this is nothing more than a bear market bounce. We had the same thing back in March,” Oxbow Advisors managing partner Ted Oakley recently told Yahoo Finance Live.
“This looks very normal. You get these all along. We don’t see anything that would make you even remotely believe we’re into a new bull market here.”
The economic impacts of a worldwide slowdown haven’t fully played out yet, argues Ann Berry, founder of Threadneedle Ventures.
“I don’t think that we are actually near a bottom quite yet. And the reason for that is that we haven’t really seen the full impact of what the global slowdown is going to do the US economy,” Berry recently said in a Yahoo Finance Live interview.
“If we look at the S&P 500 we know that about 40% of revenue represented from companies in that index, come from international markets which are seeing a double whammy right now. The stronger US dollar and that fact that global demand is slowing down so volumes is going to be impaired,” she added.
Should investors be buying now? And if so, what?
In speaking about companies which are able to weather recessions, Berry noted, “What I am trying to do is shore up positions in businesses like JNJ (JNJ), companies like Walmart (WMT).”
“It’s what I’m a fan of, where I do think we’ve seen cracks in valuation disproportionate relative to the stability of those businesses, and relative to navigate a recession and come out stronger on the other side,” she added.
Timing the bottom of a bear market is impossible, Megan Horneman, chief investment officer at Verdence Capital Advisors wrote in a recent note to investors.
“While several capitulation indicators (e.g., sentiment) suggest the worst is behind us, we are cautious that we will see another leg lower as potential earnings growth becomes more realistic,” she cautioned.
“However, for investors that have cash sitting on the sidelines, gradually adding as we navigate through the bottom of this bear is recommended. Especially into those areas that may have already priced in peak pessimism and have already seen earnings estimates adjust accordingly (e.g., small and midcap),” added Horneman.
Mona Mahajan, Edward Jones senior investment strategist told Yahoo Finance Live a longer-term rally will require reining in inflation.
“If we start to see inflation rollover in earnest, you know, call it two, three, maybe and four inflation readings lower, that’s when we really could see, you know, the Fed in earnest start to not only move at a more gradual pace, but perhaps endorse a pause or so. And that’s when equities, we think, and markets broadly, will sustain a more, or mount a more, sustainable rally. That’s when you may start to see the growth parts of the market really pick up. So we’d say now, defensively oriented and tilted,” she said.
“But if we gradually start layering in some of that growth as a barbell or a complement to your defensive positioning in the months ahead, that really puts together a nice portfolio that could be set up nicely as we enter the back half of this year in 2023,” she said.
A move back towards the June lows, and even lower is possible, says Mike Wilson, equity strategist at Morgan Stanley.
“We think the June lows are vulnerable at the index level,” Wilson told Yahoo Finance Live on Friday. “We do think those June lows will be taken out at the index level. But at the stock level there’s probably many stocks that have already bottomed at that June low and that’s the name of the game- we’re trying to pick the right spots to be.”
Wilson went on to say, “What I would suggest to the listeners, is that you wait for this retest sometime in the fall, as the numbers come down and as we go through the old lows, towards 3,500 maybe [on the S&P 500]. That’s where you begin to start accumulating. Because that next low, will be the more sustainable one, that we think could lead to truly the next bull market which could be as early as next year.”
Will investors know when they see true capitulation?
“Keep in mind the last part of these bear markets are usually kind of the most vicious because you finally get that capitulation which you really haven’t seen yet,” said Wilson.
“We saw some selling of course in the spring. People were kind of bearish, but we haven’t seen any true fear. We’ve seen people kind of more agitated — and irritable about losing money. But not really fearful. And I think that’s still coming,” he added.
Capitulation happens when we stop asking about it, Steve Sosnick, chief strategist at Interactive Brokers recently told Yahoo Finance Live.
“We haven’t given up all hope,” noted Sosnick, as people are still asking when is it time to buy stocks.
“The real capitulation happens when people say, ‘Oh God. I don’t even — don’t talk to me about this anymore,'” he says.