What the bull giveth, the bear taketh away. Investors who thought the bear market might be over after summer’s strong gains got a reminder this fall that bear market rallies can be exhilarating but fleeting.
Following a 24 percent drop from the record high in January through mid-June, the S&P 500 index rallied 17 percent through mid-August, only to fall again, under-cutting its June low.
Welcome to phase two of the bear market, says Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. We could be entering what is often the longest phase in the market’s bottoming process, notable for the kinds of zigs and zags we’ve been living through.
“For investors, the consolidation phase will likely present the biggest test of emotional fortitude and investment discipline,” Samana says. “Sharp rallies may present a siren song of opportunity that will try to entice investors with the promise of quick gains, only to be dashed quickly by disappointments that lead prices back to the lower end of the trading range.”
Investors have plenty to worry about—chiefly persistent inflation, climbing interest rates and a looming recession. Given the unusually murky market outlook, strategists at Goldman Sachs in late September lowered their year-end target for the S&P 500 from 4,300 to 3,600.
“The forward paths of inflation, economic growth, interest rates, earnings and valuations are all in flux more than usual, with a wider distribution of potential outcomes,” the strategists told clients in a recent note.
The engine that ultimately drives the stock market is corporate profits. As long as earnings growth stays on track, corporate America—and by extension, your stock portfolio—remains on solid ground.
But the run-up to the third-quarter earnings season has been rocky, with companies such as FedEx, Nike and cruise operator Carnival warning investors about disappointing results that have been dented by slowing economic growth, a rapidly strengthening dollar (which hurts U.S. multinational firms) or continued high costs.
The key question is whether these profit shortfalls reflect company-specific malaise or whether they are a broad-market bellwether portending widespread distress.
“Company-specific challenges notwithstanding, we know that the macroeconomic landscape is expected to be tougher,” says Sheraz Mian, director of research for Zacks Investment Research. “Europe is practically in a recession already, and China has held itself down with its zero-COVID policy. The U.S. economy has been faring better, but everyone knows there is pain ahead.”
What to do now? Stick with high-quality stocks that could potentially lead the market coming out of the downturn, says Wells Fargo Investment Institute. In this camp Wells Fargo puts high-quality U.S. large—and mid-cap stocks, with sectors to consider including technology, energy and health care.
Or explore stocks that are bucking earnings-estimate downgrades. According to BMO Capital Markets, companies in the S&P 500 with the highest percentage change over the past three months in per-share earnings estimates for the year ahead include specialty chemical firm Albemarle (ALB), warehouse club giant Costco Wholesale (COST), food distributor SYSCO (SYY) and Ventas (VTR), a health care real estate investment trust. All are rated “buy” by BMO analysts.
(Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
