Will earnings season save the markets from further pain?
Maybe in a separate universe, the stock market only goes up. Just not in this one. The entire market has sold off in recent weeks as the Fed prepares to raise interest rates — historically a negative for stocks — while necessary for high inflation.
Blood in the streets
The damage is widespread — beyond the usual risky stocks — just how bad?
- The NASDAQ is in correction mode — down more than 10% from its 2022 high.
- Over 60% of stocks in the S&P 500 are down at least 10% (via FT) — leaving energy as the only sector that’s up in 2022.
During the last period of rate increases in 2018 — the NASDAQ fell nearly 20% before the Fed stepped in to prevent further damages. In comparison, it’s only down 12% so far and the Fed still has the bigger issue of inflation to fix. has
Will earnings save us?
Earning seasons — which kicked off last week — could be the market’s wildcard. Earnings is one of stocks’ biggest drivers — with any sign of weakness possibly sending them lower.
- Earnings season had an “ominous” start, according to the chief US strategist of research firm, Ned Davis (via CIO).
- Ned Davis noted of the reported earnings from 5% of S&P 500 companies out so far — most are not beating expectations.
While the sample size is low, it’s a worrying start. Famous value investor and long-term market crash caller, Jeremy Grantham, sees an even bigger correction ahead — with nearly every asset (i.e. real estate, bonds, stocks) in a bubble.
Investors: Hunker down…
It’s going to be a rough couple of months before seeing signs of easing inflation. Until then, the market is in for more volatility. So what can investors do at this stage?
- BTD: Buy the dip by dollar-cost averaging into positions — with a focus on companies with strong fundamentals.
- De-risk: Sell higher risk companies and move towards safer ones.
If you thought stocks can’t go anywhere lower — they most definitely can. But timing the bottom is incredibly difficult — even for professionals.
Keep your eyes on: The Fed is meeting today and tomorrow — with investors expecting them to signal interest rates to come as soon as March.