It's my feeling that it's helpful to look at both sides of a trade when you invest. And when I look at market forecasts or opinions, I look at both bear and bull sides. So here's a couple of bull & bear market articles on front pages today.
BULL
Despite its gloomy title, this article by Ryan Vlastelica and Michael Msika makes a lot of bullish points.
As the title says, valuations are starting to normalize:
Yet a number of investors are starting to see a light at the end of the tunnel. The Nasdaq 100 now trades for about 20 times its estimated forward earnings — in-line with long-term averages — as frothy valuations built up during the pandemic recede. The Philadelphia Semiconductor Index, home to chipmakers including Intel Corp. and ASML Holding NV, trades at about 15 times expected earnings for the next 12 months, well below a peak of 24 hit in early 2021.
This graphic in the article illustrates how tech stocks are starting to approach a long term average seen in recent decades. The point is ultimately that it may be time to prepare to re-enter the market, and includes backup from a variety of analysts:
“It’s hard to be patient when there’s been so much carnage. But the pain should end, possibly soon,” said Jordan Stuart, client portfolio manager at Federated Hermes. “Our recommendation is growth investors need to be ready.”
Wells Fargo Securities said it is pausing its negative view on growth names since bearish sentiment hit a near-term extreme. Indeed, the number of companies trading above their 200-day moving average has hit rock-bottom levels last seen in the first part of 2020, while Bank of America Corp.’s popular gauge of investor sentiment is in what it called “unambiguous contrarian buy territory.”
For Kevin Mahn, who runs Hennion & Walsh Asset Management, cash-rich Apple and Microsoft will recover losses over time as “most of the damage is done” and some good opportunities are being created in tech.
With some caveats:
He is cautious on the timing of a rebound, however, as the market hasn’t yet shown signs of capitulation. “I’m certainly not going to call a bottom, and I’m sure there will be further bouts of selling ahead,” he said.
On the other hand, how accurate are the recent decades' long term averages if the conditions going forward are very different?
“Markets are getting used to the fact that the very driver, which drove this fantastic investment environment for the last 10 years, is not going to be there any more,” Maria Elena Lagomasino, chief executive officer of WE Family Offices, said in an interview on Bloomberg TV. Without favorable conditions, such as low inflation and rates, “the market is now trying to figure out what the new paradigm is going to look like.”
So what are institutional investors doing?
In terms of market positioning, there has been an exodus already. A recent BofA survey showed fund managers are “very short” tech, with allocation to the sector at its lowest since August 2006.
Other signals to note: falling put to call ratios.
The options market is also pointing to a potential rally. Options on the $157 billion Invesco QQQ Trust Series 1 ETF tracking the Nasdaq 100 Index show a put-to-call ratio based on open contracts that recently hit the lowest level in two years. Outstanding calls have surged to the highest since 2008.
Another source of lift for tech stocks may be coming from abroad as US-listed Chinese stocks may be back in play.
Chinese internet stocks emerged as an unexpected bright spot in another turbulent week for tech, thanks to repeated pledges from Beijing to prop up the beaten-down group and a reduction in the interest rate on long-term loans. That helped fuel a 4.7% rise in an index of 81 US-listed Chinese stocks last week.
The basic idea here is that seasonal patterns in the market exist. In March, I was telling people that there's generally a market rally between mid-March & the 3rd week of April because of people putting money into IRAs before the tax filing deadline. That pattern did appear, but it didn't stop people from being disappointed when it was over. So far in 2022, I've seen that seasonal patterns associated with workplace investing has been holding, which brings us to a Summer rally that usually starts in June.
This article by Mark Hulbert addresses seasonal patterns and says that if they hold, you should see some gains if you buy in June.
My research produces both good and bad news about a possible summer rally. The good news is that, based on historical averages alone, the stock market is likely to be 7.3% higher than where it stands today at some point this summer. In terms of the Dow Jones Industrial Average DJIA, +0.03%, that’s a gain of nearly 2,300 points.
To ensure I had captured the greatest possible rally potential for the summer, I measured the stock market’s gain from the end of May to its highest level during the three-month period from June 1 to Aug. 31. This gain is hypothetical, of course, since only in retrospect will we know when that highest level has been hit. But it’s hard to imagine that, when using any other definition, the summer rally could be any bigger.
I applied my definition to the Dow Jones Industrial Average back to its creation in 1896. On average, the summer rally as so defined measured 7.3%. That’s how much the market will rally from the end of May to its highest level during the coming months of June, July and August — assuming this summer is “average.”
However, Hulbert cautions that this should be taken with some caveats:
The bottom line? The market will undoubtedly rally at some point this summer. But there’s no seasonally based justification for expecting a stronger such rally this summer than at any other time of the year. That, in turn, means you shouldn’t change your current investment posture just because summer is about to begin.
BEAR
The author, James Mackintosh, argues that the market might shape up to be a “a series of bear-market rallies that don’t last, hurting dip buyers and further damaging investor confidence”.
About calling a bottom, he says that while everybody is scared, “That worked beautifully for timing the start of the 2020 rebound, but this time around may not be enough.”
He says that for there to be some kind of fed rescue like there was in 2020, central banks and governments would have to also be scared by stocks falling. But they're actually afraid of inflation, not stocks falling. The author then goes on to describe what happened to stocks the last time the fed had to deal with inflation like this:
this time could be more like 1973-1974. Just as then, the primary concern of the country is inflation, thanks to a war-related oil-price shock. Just as then, the inflationary shock took hold when the Fed had rates far too low given the scale of political stimulus for the economy. Just as then, favored stocks—the Nifty Fifty, now the FANGS and associated acronyms—had soared in prior years.
Most important, in 1974 the Fed kept raising rates even as a recession took hold because it was running to catch up with inflation. The result was a horrible bear market interspersed with soul-destroying temporary rallies, two of 10%, two of 8% and two of 7%, each snuffed out.
In other words, the author envisions a scenario in which this could become a deep, harsh and prolonged bear markets. But then he goes on to say that it's not likely to get that bad this time around:
So far, this time has been nothing like as bad for stocks, not least because the economy isn’t in recession. If inflation comes down, the Fed won’t need to raise rates as much as it has indicated, which would be a big boon for the stocks that have suffered the most.
Personal note: I agree that a multi-year stagflation is unlikely, if for no other reason that we're still due a post-pandemic rebound and the US has become a major energy producer thanks to shale oil production and should not be as vulnerable to being economically crippled by energy shocks as it was in the 1970's.
In this article, Akane Otani says that the bear market has a way to go before hitting bottom. The key points are: (1) The fed has just started its rate hike regimen, and there are more months to go before it is over, (2) too many investors are hanging onto their stocks, (3) the volatility index, VIX, is still low, and (4) too many people are continuing to buy the dip in tech stocks (implying they're not that worried). This is a contrarian viewpoint where stocks were in a bubble and that people have to be scared out of the market for it to truly bottom (a.k.a. “the froth” has to be taken out).
Then the author reviews a stock, Starbucks, that should be rising if the market had bottomed.
The author then discusses the difficulty of trying to contain inflation without kicking off a recession right now, and then goes on to quote someone about how “the markets will have a hard time finding a definitive bottom before the Fed is done tightening monetary policy, or it has convinced investors it is succeeding in bringing inflationary pressures down without risking a recession.”
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