Stocks Have Had Their Worst January Since 2008. That’s Creating Buying Opportunities

Barron's2022-01-31

The 2022 market was always going to be a tug of war between earnings and interest rates. Corporate profit growth fueled by the reopening has come up against contracting valuations and expectations of ...

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JeffreyNeo
2022-01-31
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Corporate profit growth fueled by the reopening has come up against contracting valuations and expectations of ...</p>\n\n<a href=\"https://www.barrons.com/articles/stock-market-volatility-investing-opportunities-51643420533?mod=hp_LEAD_1\">网页链接</a>\n\n</div>\n","source":"lsy1610680873436","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Stocks Have Had Their Worst January Since 2008. 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That’s Creating Buying Opportunities\n</h2>\n\n<h4 class=\"meta\">\n\n\n2022-01-31 07:51 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://www.barrons.com/articles/stock-market-volatility-investing-opportunities-51643420533?mod=hp_LEAD_1><strong>Barron's</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The 2022 market was always going to be a tug of war between earnings and interest rates. Corporate profit growth fueled by the reopening has come up against contracting valuations and expectations of ...</p>\n\n<a href=\"https://www.barrons.com/articles/stock-market-volatility-investing-opportunities-51643420533?mod=hp_LEAD_1\">网页链接</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":".SPX","symbol_name":"S&P 500 Index","start_time":0,"source_url":"https://www.barrons.com/articles/stock-market-volatility-investing-opportunities-51643420533?mod=hp_LEAD_1","article_id":"1125536439","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=1125536439","pubTimestamp":1643586675,"columns":[],"sourceInfo":{"source_id":"lsy1610680873436","name":"Barron's"},"weMediaInfo":null,"summary":"The 2022 market was always going to be a tug of war between earnings and interest rates. Corporate p","collect":0,"end_time":0,"defaultTopTitle":"barrons.com","property":[],"viewcount":null,"language":"en","relate_stocks":{".SPX":"S&P 500 Index",".DJI":"道琼斯",".IXIC":"NASDAQ Composite"},"translate_title":"股市经历了自2008年以来最糟糕的一月份。这创造了购买机会","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{".DJI":0.9,".IXIC":0.9,".SPX":0.9},"content_text":"The 2022 market was always going to be a tug of war between earnings and interest rates. Corporate profit growth fueled by the reopening has come up against contracting valuations and expectations of tighter monetary policy. While the battle has led to a chaotic period for stocks, the past few weeks have played out logically and according to script. Financial markets are entering their next chapter, and investors are finally rushing to adapt.“If the Fed really wants to fight inflation, that means higher long-term interest rates and long-duration assets will not work,” says Richard Bernstein, CEO and chief investment officer of Richard Bernstein Advisors, a global macro investment manager with about $16 billion in assets. “The problem is that everyone came into the year long long-duration assets.”Long-duration assets, including many growth stocks and long-term bonds, are particularly sensitive to changes in interest rates. As rates rise, the present value of future cash flows declines, lowering today’s prices.The S&P 500 index is down 7% this year. (Friday’s late-day rally helped stocks avoid a fourth-straight week of declines.) Losses in the tech-heavy Nasdaq Composite are even greater, while the small-cap Russell 2000 is in a bear market. For many investors, the selloff feels unfamiliar—there hasn’t been a 10% correction in the S&P 500 since March 2020, and the index had just one 5% pullback in all of 2021.But 2022 could actually be closer to normal, with the recent low-volatility conditions more the exception. Since the S&P 500 was created in 1957, the index has averaged about one 10% decline and more than three 5% declines every year, according to Dow Jones Market Data. The good news is that selloffs create opportunities, and 2022’s is unlikely to be different.Jack Ablin, CIO at Cresset Capital, calls January’s drop a “garden variety technical correction,” as opposed to a more pernicious cyclical downturn or systemic problem facing the market. Stocks aren’t falling because analysts are lowering profit forecasts en masse, or because economists are predicting a recession on the horizon. Instead, the correction has taken place because of how richly the market is valued.“Valuations may have gotten out of whack, and now we’re experiencing a revaluation of the market because interest rates are going up,” says Ablin, whose firm manages about $22 billion. “It’s like ripping a Band-Aid off.”Great ExpectationsOn Wednesday, Federal Reserve Chairman Jerome Powell made it clear that it’s not the central bank’s job to put a floor under the market—the so-called Fed put. He remarked that asset prices remain “somewhat elevated,” and noted that households had plenty of savings and could withstand further declines before the situation begins to be a meaningful problem for the U.S. economy.The Fed is set to begin lifting its target interest-rate range from near zero as soon as March, with bond-market pricing suggesting a total of five quarter-point increases in 2022. Back in October, the market had priced in just one hike. That shift in expectations has been felt in Treasuries, where yields have risen, and in high-multiple stocks and other particularly pricey assets.Buzzy technology stocks trading for eye-watering multiples of future expected revenues, unprofitable initial public offerings, special purpose acquisition company mergers, meme stocks, and cryptocurrencies are among the biggest losers this year. Meanwhile, the 10-year Treasury note’s yield has risen by 0.28 of a percentage point in 2022, to 1.78%, as its price has declined.Credit markets and many overseas stock indexes have held up much better than the S&P 500 and Nasdaq, and the price of gold is down, confirming that the recent scare isn’t about a general flight to safety.“Fundamentals, generally speaking, remain quite stable and in good shape,” says Dubravko Lakos-Bujas, J.P. Morgan’s chief U.S. equity strategist. “It’s really a question of multiples.”Powering ThroughIn fact, the early 2022 selloff has fallen neatly along valuation lines. Through Wednesday, S&P 500 stocks with low price/earnings ratios had outperformed those with high multiples by 11.5 percentage points since the start of 2022, according to Patrick Palfrey, co-head of quantitative research at Credit Suisse.The same dynamic is true across sectors. That pattern should hold up as interest rates and bond yields continue to rise this year. Other defensive stock characteristics—think low leverage or high returns on equity—have been less of a factor.“The valuation gap between the expensive and cheaper stocks is still very high, relative to history,” Palfrey says. “There’s a fair amount of opportunity for cheap companies to continue outperforming from here.”One way in which 2022 might differ is that traditionally cheap sectors are getting even cheaper because of postpandemic, reopening patterns. That’s as pricier growth stocks face tough comparisons to a strong 2021.Energy stocks are expected to grow earnings per share by 45% this year, with industrials up by 39%. Technology, meanwhile, is seen increasing EPS by just 9%.It’s another sign that the economy isn’t the problem.Volatility Spike“A hawkish Fed and interest-rate increases don’t necessarily equate to the end of the bull market, as long as economic growth remains strong,” says Nuveen CIO Saira Malik.Malik, who also manages the $139 billion College Retirement Equities fund, favors companies that can control their own fate in an inflationary environment and growing economy. Energy stocks are one option. They offer commodity exposure that should insulate them against inflation while benefiting from a global economic reopening. Malik points to Pioneer Natural Resources (ticker: PXD) and Valero Energy (VLO), in particular.Malik also likes some established front-office software companies whose stocks have been punished. Those include Salesforce.com (CRM), which is down 28% since mid-November, and HubSpot (HUBS), off 46%. Unlike stay-at-home pandemic winners, Salesforce and HubSpot should benefit from a return to the office and increased corporate spending.Given inflation uncertainty, volatile markets, and a rising-rate environment, Cresset’s Ablin recommends a similar quality bent, with a focus on dividend-paying shares. He likes Abbott Laboratories (ABT), Johnson & Johnson (JNJ), 3M (MMM), Caterpillar (CAT), Automatic Data Processing (ADP), and McDonald’s (MCD).In the near term, some of the big losers in January—technology stocks, biotechs, and small-caps—could see a rebound, says Lakos-Bujas, but not because uncertainty around inflation and Fed policy are going away. Rather, the market just looks to be in oversold territory.Investor sentiment—based on the Investor Sentiment Survey from the American Association of Individual Investors, along with the Hulbert Stock Newsletter Sentiment Index—is at its most bearish level since the March 2020 selloff. Those are contrarian indicators, with history suggesting positive market returns going forward when they’ve reached similar levels. It recalls the Warren Buffett adage about being fearful when others are greedy, and greedy when others are fearful.Valuations are now relatively undemanding, as well. The S&P 500 closed the week with a forward price/earnings ratio of 20.1 times. That’s only one point higher than the index’s valuation at the end of 2019, before the Covid-19 pandemic hit, and before Tesla (TSLA) joined the S&P 500.Even traders have gotten more defensive, with the S&P 500 put-to-call ratio spiking since the start of the year. That’s a sign investors are looking to hedge their market exposure, according to Michael Green, a portfolio manager and chief strategist at Simplify Asset Management, which offers several exchange-traded funds with options-based strategies. The firm’s largest ETF is the Simplify US Equity PLUS Downside Convexity (SPD), which aims to protect returns during volatile drawdowns.If the past week felt particularly turbulent, that’s because market volatility can breed more volatility, Green observes. As demand rises for put options—which increase in value as the price of a security falls—options writers often add to the selling pressure. In order to hedge their market exposure and limit risk, they may short the same stocks they’ve sold puts on. That has contributed to the massive swings seen in recent days, and it works in both directions.For investors, the volatility is painful, but selling out now would be a mistake. Instead, investors should use the selloff to rebalance their portfolios.“When you see incredible volatility, that’s when you need to be maximally dispassionate,” Bernstein says. “Volatility tells you that leadership is changing in the market.”Growth stocks won’t be the leaders in the next phase—bad news for tech and good news for more sleepy corners of the market. 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