- The S&P 500 joined the Nasdaq in an official bear market this week as stocks sold off once again.
- Investors continue to be spooked by inflation readouts and the implications for interest rates.
- 3 experts laid out where the Fed’s latest move leaves markets and what investors should do next.
The S&P 500 has followed the Nasdaq into an official bear market , as stocks around the world saw another week of heavy selling pressure.
Investors continue to be spooked by way-above-target inflation readouts and the implications they have for interest rates and the economy.
Indeed, such is the concern over price rises beings persistently above 8% in the US that the Federal Reserve upped the rate hike ante by going for a 75 basis point rise on Wednesday, rather than the expected 50 basis points.
Despite the trouble-filled picture, it is crucial for investors to keep in mind that a sliding stock market turns around before the economy is back in good shape. Markets price in events a long time before they actually happen.
This means people who are too cautious and sit on the sidelines with their cash too long will miss much of the rebound when it inevitably comes. So while “catching a falling knife” is risky, so is too much caution.
Richard Saperstein, chief investment officer at $9 billion money manager Treasury Partners, is turning his attention to identifying the bottom, but does not think we are quite there yet.
“We are hesitant to call the bottom in stocks until we see the impact of quantitative tightening, which is an undertow that could drag stock prices lower. There is massive uncertainty right now over quantitative tightening and investors should brace for additional volatility ,” he said.
“In addition to uncertainty over the Federal Reserve’s efforts to tame inflation, we don’t believe the market has priced-in tail risks from the ongoing war in Ukraine, which is another concern for the market. We are maintaining elevated levels of cash, although we are in no rush to put new money to work in the stock market.”
Although still bearish on the market overall Saperstein said he sees opportunities within large-cap tech stocks with strong cash flows and moats around their businesses. Stocks with growing recurring revenues will be attractive in a slow growth environment with increasing recession risk, he noted.
Brian Nick, chief investment strategist at Nuveen said inflation may have now peaked, but that does not mean markets are going to rebound soon and could just “plateau.”
“Inflation has not moderated as much as either the Fed, the market or, frankly, we expected it to over the first five months of the year,” he said. “This is largely because the ongoing war in Ukraine has pushed up prices of goods and services that are sensitive to food and energy costs. This includes gasoline, but also core services like airfares.
“While goods like furniture and appliances are now experiencing disinflation or outright deflation, this has been more than offset by a broad-based rise in service prices. Service price inflation, which includes rent, covers most consumer spending and is often more persistent than goods price inflation.”
Core inflation, which excludes food and energy prices, seems to have peaked, but rising fuel costs may prompt that reading to plateau before it drops, he said.
Given this cautious outlook Nick recommends staying defensive for now.
“We are allocating more to areas of the market that benefit when growth becomes scarce, mainly in the technology sector ,” he said. “Investors wishing to be even more defensive can consider utilities or consumer staples, but many already trade with a significant valuation premium given their history of outperforming during bear markets.”
Nick flagged real assets, which often refers to commodities, as sources of income and a hedge against inflation — a plus in the current environment. But investors must exercise cautions, he said. Treasury-inflation protected securities (TIPS) for example, often perform well when inflation expectations are rising, but investors can lose money when actual inflation is high and the Fed is aggressively tightening, he said.
“Gold and other ‘dollar substitutes’ also seem good in theory to offset inflation and devaluation, but they have not kept up with the surging US dollar as markets price in higher rates,” he added.
Other real assets such as real estate like farmland and timber can be difficult for some investors to access, even if they do offer many of the benefits a buyer might seek, such as income and inflation resistance – but without the daily volatility that more liquid assets often feature, he said.
While the cost of individual commodities will eventual retreat, inflation has started to pervade areas of the economy where a cooling off can take much longer.
“Inflation has been stickier and more persistent than was expected, so it is unlikely now that this problem will simply just dissipate quickly over the second half of the year,” added Richard Carter, head of fixed interest research at wealth manager Quilter Cheviot.
“High oil prices continue to keep inflation elevated and there are fears that as China switches back on following various lockdowns we will get another demand shock and this could make inflation remain stubborn,” he said.
“Investors are understandably concerned that such a sharp pace of monetary tightening will lead to a recession and markets are likely to remain volatile until we reach a peak in inflation,” Carter continued. “In the near term equity markets, and in particular growth companies, are unlikely to react well to this news.”
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