Potential Market Inflection Point Imminent?
The Dow Jones just notched its fifth consecutive week of losses, joining the S&P 500 in correction territory (>10% off its highs) while the Nasdaq is in a bear market (>20% off its highs). Commodity prices are soaring, the war between Russia and Ukraine is worsening, inflation is raging, and the Federal Reserve will begin increasing rates. The backdrop seems ominous however the markets may be just one positive headline away from an inflection point to turn the tide in a positive direction. The potential of a massive market swing to the upside was just witnessed in the back half of March.
Timing the market has been proven time and time again to be nearly impossible however what is possible is capitalizing during these correction periods and buying heavily discounted stocks. These correction periods are great opportunities for long-term investors via dollar cost averaging throughout these long stretches of suppressed conditions. As the best market days typically follow the worst market days, building stock positions and riding out the volatility has proven advantageous. Missing out on just a few of the best performing days of the market in any given year can drastically alter investor returns and yield dramatically inferior results.
The Russian/Ukraine War:
Conditions between Russia and Ukraine continue to worsen while the west slaps sanction after sanction on Russia for its aggression. However, per Bank of America, stock declines related to the conflict may have bottomed.
“The S&P 500′s -12% decline from its peak suggests much of the froth has been taken out,” said Savita Subramanian, strategist at Bank of America. “Stocks are largely pricing in the geopolitical shock, where the S&P 500 fell 9% from peak-to-trough since Russia-Ukraine headlines in early Feb, similar to a typical 7-8% fall in prior macro/geopolitical events.”
As such, given any positive news coming out of the geopolitical conflict, this could serve as a catalyst for the markets roar higher. Especially given that the markets have priced-in, via an equivalent magnitude of selling, when compared to similar events.
Moderating Valuations and Potential Inflection Point:
Valuations have moderated significantly, down near 18x forward price-to-earnings for S&P 500 from 21x. The Nasdaq has come down to 24x from 31x at the 2021 peak. Also worth noting, is the potential for the latter half of March to serve as an inflection point in the markets. The only time the market lost at least 2% in each January, February and March was 1935. The month of March has been notorious for staging market trend reversals (2000, 2003, 2009 and 2020).
Panic Selling Mistake:
A highly volatile market may convince investors to panic sell into the vicious selling however this will likely prove to be a costly mistake.
Per Bank of America, going back to the 1930s, if an investor sat out the 10 best days of every decade, he would have earned just 45%. By contrast, investors who held on during volatile swings would have found their gains soared by nearly 20,000%.
These data demonstrate the costs of trying to time the market over the long-term. As the best market days usually follow the worst ones, the key is patience and seeing this rough patch through.
Figure 1 – Analysis conducted by Bank of America and graphic re-purposed from CNBC
Per Bank of America, the latest rout in stocks represents an opportunity for investors and buy the dip. “The shift toward fast-money and quantitative strategies has left a market rife with long-term inefficiencies: long-term dispersion, or available alpha, sits at multidecade highs,”. “And for US stocks, lengthening one’s time horizon has been a recipe for loss avoidance.” “History tells us that geopolitical dips should be bought, not sold,” per BofA’s Subramanian.
All major indices are either in a correction or bear market territory as a function of major macroeconomic factors weighing on market sentiment. There’s a confluence of soaring commodity prices, the worsening war between Russia and Ukraine, raging inflation, and the rising interest rate environment. Despite all the negative attributes, the market may be on the cusp of an inflection point. The S&P 500′s 12% decline from its peak suggests that stocks are largely pricing in the geopolitical risks. The S&P 500 has fallen 9% from peak-to-trough since Russia-Ukraine headlines in early Feb, in-line with a typical 7-8% fall in historical geopolitical events.
Valuations have moderated significantly, down near 18x forward price-to-earnings for S&P 500 from 21x. The Nasdaq has come down to 24x from 31x at the 2021 peak. Also worth noting, is the potential for the latter half of March to serve as an inflection point in the markets. The only time the market lost at least 2% in each January, February and March was 1935. The month of March has been notorious for staging market trend reversals (2000, 2003, 2009 and 2020). Per Bank of America, going back to the 1930s, if an investor sat out the 10 best days of every decade, he would have earned just 45%. By contrast, investors who held on during volatile swings would have found their gains soared by nearly 20,000%.
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