Is the Market Near a Bottom
- There's reason to believe the stock market is close to its low point, according to RBC.
- Top US stock strategist Lori Calvasina expects a recovery in 2023 after some further choppiness.
- She says US electoral history, falling estimates, and bearish attitudes are all positive signs.
Even though this viewpoint is rare, it deserves our attention. There's a cloud of fear hanging over Wall Street this fall after investors' hopes for a sustained rally were conclusively dashed. But the seeds of a market comeback are often planted at the moment everyone gives up. Lori Calvasina, RBC's Head of US Equity Strategy, isn't exactly telling investors to dive head-first into the market, but she says the market's low could come in the next few weeks, with a stronger comeback in 2023.
Early in its last quarter, 2022 is shaping up to be the worst year for US stocks in two decades. Calvasina says this year seems to be following a similar pattern to 2002, and to a lesser extent, 2008. Both of which had hard economic data that were the catalyst to their downturns. Today, the only cause of the downturn is the Fed interest rate strategy.
"After the S&P 500 made an initial bottom in both of those crises and rallied back, the stock market then moved sharply lower, bounced around, and essentially made a triple bottom before a true recovery took hold," she wrote. "It's starting to feel like the post-pandemic normalization will be similar."
For buyers who are worried this year might only be the start of a multi-year losing cycle, Calvasina says 2022 looks more like the end of a protracted downturn (think 1941 or 2002) than a year at the beginning or middle of those phases.
"US equities tend to bounce back strongly," she said. "One example is 2002, when the index fell 23%, and was followed by a 26% rally in 2003. Another example is 1974, when the index fell 30% but saw a 32% gain in 1975." Refer to the Jackson brochure that you will see in your mail soon.
It's well-known that returns are strong when investors get really bearish, and Calvasina says that by one popular measure — the American Association of Individual Investors survey of investor bearishness and bullishness — they're almost as fearful as they were during the Global Financial Crisis in 2007 and 2008.
In that period, a combination of risk-taking by financial institutions and a US housing bubble led to the worst financial crisis in some 80 years. The S&P 500 lost almost half its value in a span of 18 months and took four years to recover, while US employment didn't recover until several years after that.
Even a severe US recession today wouldn't cause that kind of damage, which is why Calvasina is suggesting that investors are unreasonably bearish. She points out that when investors get this cautious — with bearish investors outnumbering bullish ones by at least 10% — 12-month forward returns hit 15.5% on average.
She added that estimates for corporate profits and revenue are coming down, which sets more reasonable expectations going forward — ultimately a good development for stocks. If estimates come down enough over the next few weeks, there might be a solid rally later in the year.
The key to that recovery might be the trajectory of inflation. Calvasina says that on corporate earnings calls, discussion about inflation and supply chains and prices "appears to have peaked," a sign that inflation could cool off next year. I agree with her assessment of inflation. I can see signs in the downturn of corporate profits and the slowdown of consumer demand.
One of the primary questions of the year is whether a recession is coming, and how steep it might be. But stock market downturns and economic downturns don't always happen at the same time. Investors generally recognize what's coming, prepare for it, and start getting more optimistic before things start to improve. Anotherwords, the recession could be the beginning of a stock market rally.
She notes that on average, the S&P 500 has returned 13.6% in years when US GDP is negative.
It's also an election year. Calvasina writes that on average, the S&P 500 rallies 7% off its lows in a midterm year like this one. If the outcome of the elections is a split or Republican-led Congress along with the current Democratic White House, that's a been good for stocks, with average returns of 13.5% in those years. Which begs the question, do we move conservative when the outcome for the end of the year could be positive?
With that in mind, Calvasina set a "preliminary" year-end target of 4,100 for the benchmark stock index. That's about 14% above Tuesday's closing price, and suggests it will take until late 2023 to erase just the last six weeks of losses. That would mean a 30% move up in the market after the year end rally. It could also mean, choppiness in the first half of the year and strong movement up in the second half of the year.
I have been saying that I would move to value after earnings reports. That is still in my thinking, but I will not move before the end of the year and may not move at all.
It is more important to be in the market when it moves up than be out when it moves down. That is because the market moves up strongly in the first several months of the move and we don’t know when that will begin. As a result, it is always prudent to stay the course when we believe we are nearing the end of the downturn. Calvasina makes a very poignant point and one I agree with. The data will prove her either correct of wrong, but for now she appears to be right on.
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