The S&P 500 Index has fallen more than 22% year to date, putting it on track for its worst annual return since the 2008 financial crisis. Many are wondering if stocks are cheap enough to start buying?
by Barron recent Big Money survey (opens in a new tab) interviewed money managers about their outlook for stocks over the next 12 months. About 40% of respondents were bullish, a surprisingly high figure given all the talk of the recession.
While the 40% figure is 700 basis points (one basis point = 0.01%) higher than the same survey last spring and indeed signals growing sentiment among some fund managers, it should also be noted that bearish sentiment also rose (to 30% from 22%). This left 30% of respondents saying they are neutral on the outlook for equities over the next 12 months, down from 45% seen in late April.
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Hence, the prospects for equities from professional investors have apparently become more certain – positive or negative – towards 2023.
But what does this mean for retail investors who may be considering bargain hunting in today’s market?
Stocks are historically cheap right now
Data from Yardeni Research shows that the price-to-forward (P / E) ratio of the S&P 500 as of October 19 is 15.6, down significantly from over 22 at the end of 2020. In recent years, just the March multiple 2020 was lower.
The difficult part of determining how affordable stocks are is that each statistic or data has a plausible opposite argument. So we won’t know when the stocks are at their lowest until it’s too late.
And just because stock valuations are relatively low right now doesn’t mean you should dive right in for fear of getting lost. True, we are in a historically bullish phase for the stock market and technical analysis indicates a short-term upside for stocks.
However, there are also several signs of a further decline in stocks. For example, Savita Subramanian, an equity and quantitative strategist at BofA Securities, reminds investors of the rule of 20. She says a sustainable minimum is never reached when the US market’s P / E S&P 500 and the consumer price index. (CPI) of the US market have combined a value above 20. Currently, this figure approaches 30.
BofA says there are other warning signs as well.
“Our bull market signals continue to suggest that the market has not yet hit bottom,” Subramanian says. These signals include the 20 rule as well as a steepening of the yield curve and the Federal Reserve cut interest rates, among others.
Similarly, Goldman Sachs believes that markets are still expensive despite falling more than 22% in 2022. One indicator they point to is the Earnings Yield Gap, which measures the difference between government bond yields and yields. of stock dividends.
“Despite the high risk of recession, geopolitical tensions and a generally obscure macroeconomic outlook, the gap between earnings returns – a common indicator of the equity risk premium – is trading close to the lowest levels in 15 years,” says a team of Goldman Sachs strategists.
Translation: The risk / reward proposition for stocks is not good, based on this metric.
Should Investors Buy Stocks Right Now?
It depends. Investors may want to consider their time horizon first before entering.
The seasoned trader realizes that a long-term investment horizon contributes greatly to winning in the markets. And while 2023 may very well be the second consecutive bearish year for equities, markets eventually rise more than they fall.
Capital Group, a Los Angeles-based money manager, published an article in 2019 titled “Time, not timing, is what matters.” It proved that in 91 years if you invested for periods of one year, i.e. invest money at the beginning of the year and withdraw it at the end, you would have had positive returns 73% of the time.
If you run the same exercise over three-, five-, and 10-year periods, you get 83%, 87%, and 94% positive results respectively. So the longer the money has been invested, the greater the likelihood of positive returns.
And with the shares priced lower than they have been in recent years, it’s easy to see why so many money managers are excited about the future.
“We are super excited about what the next decade will look like for investors,” said Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management in late September. by Barron item (opens in a new tab). “It looks very different from the last 14 years. The opportunities are much more diverse and wider.”
Furthermore, “this year’s bear market offers an attractive opportunity for long-term investors, in our view,” Subramanian says. “Earlier this year, our long-term valuation model predicted negative returns over the next decade (-1% per year). But today it predicts price returns of + 6% per year, the highest level. high since May 2020. With ~ 2% dividends, it implies around 8% total returns, easily beating the risk-free rate of 4%. “
And Goldman Sachs strategists say there are areas of the market where stocks are cheap enough to find good deals. These include value stocks and small cap stocks, which look attractive compared to their growth and large cap peers, respectively.