If 2022 ended today or tomorrow, it would go down in history as a bad year for investors. The S&P 500SPX -1.07% index is down 17%, the once-buoyant Nasdaq CompositeCOMP -1.31% is nursing a loss of 25%, and the Dow Jones Industrial AverageDJIA -1.07% is down 13% year to date.
Given the variety of issues eroding investor confidence and returns, selling may persist throughout the fall and beyond. The world is even more hostile than it was at the beginning of the year, inflation is stubbornly high, and the Federal Reserve is determined to raise interest rates to slow it.
However, this year’s unrest also presents an opportunity: Stocks are more affordable than they’ve ever been, and shares of businesses with competitive business strategies, strong balance sheets, and consistent cash flows are calling. Given that many categories of fixed-income securities currently have their highest returns in years, there are more options available than ever before. Many Wall Street strategists succumb to the temptation to concentrate on macroeconomic factors that have lowered equities and increased bond yields in the first eight months of the year. However, savvy investors may be able to capitalize on the current unfavorable trends.
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Eight Wall Street strategists were recently polled by Barron’s to gather their thoughts on the year’s remaining investing outlook. Individual predictions range from 3600 to 4800, but the group’s average aim has the S&P 500 at 4185 at year’s end, up 6% from recent levels. With only four months left in the year, it is an extremely huge gap that reflects vastly different opinions on the health of the economy, corporate earnings, and the Fed’s commitment to fighting inflation.
Some strategists, such as Ed Yardeni, owner of Yardeni Research, predict a mild recession rather than a severe decline in the economy. If there is a recession, he predicts that it might be brief. “Or, it might be a rolling recession, like we arguably witnessed in the middle of the 1980s, that hits different sectors at different periods.”
Although the first and second quarters of the United States’ GDP both had annualized declines of 1.6% and 0.6%, respectively, underlying trends do not indicate that the economy is in a recession. Sonal Desai, chief investment officer of Franklin Templeton Fixed Income and a member of Barron’s Roundtable, claims that when she examines the fundamentals of the economy, including corporates, households, and consumers, “the actual economy doesn’t appear so bad outside of inflation.”
According to Desai, there are now little signs of a general downturn in economic activity, and the next year may see more of a stagnant, zero-growth economy than one that is significantly contracting. Even while inflation is eating away at salaries, consumer balance sheets and the health of the labor market have a lot to do with it. Annual inflation of 8.3% is equivalent to wiping one month off of a worker’s annual salary, and savings can only last so long.
Bulls in the stock market are sufficiently optimistic about the future of the market by the possibility of an inflation peak. Investors may anticipate less harm to the economy and earnings if inflation continues to fall as they look ahead to when the Fed’s tightening cycle will come to an end.
Dubravko Lakos-Bujas, the head of J.P. Morgan’s U.S. equity strategy, expects the S&P 500 to reach 4800 by year’s end, which would represent a 20% increase from current levels and a record high. He does not see a worldwide recession and anticipates inflation reducing as other pressures like commodity prices fall. The relative exposure of funds to the stock market was lower than 90% of historical readings as of late August, he says, indicating that people are underinvested. He anticipates that over the coming few months, indexes will rise as daily inflows into equities of several billion dollars a day supplement corporate share buybacks.
Before a potentially more difficult 2023, Wells Fargo’s head of equity strategy, Christopher Harvey, expects the economy and profitability to hold up in the second half of 2022. He believes that the pressure that rising bond yields are putting on stock multiples has mostly subsided and does not anticipate the Fed becoming more hawkish.
The fundamentals aren’t as awful as anticipated, the Fed will slow down, and rates have reached their peak, according to Harvey. The growth side has been more prevalent in the areas where we have started to see some unfavorable revisions and margin compression. And in the early half of this year, we already witnessed that significant derating there. Remember that this was the worst first half in more than 50 years. Since much of the negative news has already been discounted, a bounce wouldn’t be unexpected.
Harvey has consistently set his S&P 500 year-end objective at 4715. In a potentially more unstable economy next year, he advises a growth-at-a-reasonable-price orientation that places an emphasis on quality. In contrast to telecom, he is positive on communication services that lean more toward media and technology, and pessimistic on software and retail equities. Harvey also suggests building a “barbell portfolio” of more defensive businesses, notably those in the food, beverage, and cigarette industries. One approach to carry out this concept is through the Invesco Dynamic Food & Beverage PBJ -0.75% exchange-traded fund (PBJ ticker).