With the S&P 500 now in a bear market, advisers have been looking at how to position portfolios over the short-to-medium-term.
The index is down roughly 20% from its all-time high in January, officially putting it in bear market territory. While no bear market is the same, this decline is the result of tightening rates to curb runaway inflation.
The inflationary concerns show no signs of abating, but supply chain issues which have contributed to the issues do show signs of ceasing.
Brian Huckstep, chief investment officer at Advyzon Investment Management said the Marine Exchange of Southern California is reporting that the number of container ships waiting off the coast of Los Angeles is back down to a much normal number.
This, combined with a loosening of China’s zero-Covid policy and Tesla reporting that its Shanghai Gigafactory has returned to full production is cause for optimism.
“High year-over-year inflation numbers should swiftly return to normal as shortages are worked out and pressure for the Fed to quickly increase interest rates subsides,” he said.
Bounce in cannabis-related stocks
While this may take some time to fully stabilize, advisers need to look for areas across asset classes that are showing signs of value – possibly looking to less conventional areas.
Huckstep said that cannabis-related stocks have shown signs of life over the last week, many up 8-10% after falling more than 60% in the first half of the year.
He said: “Although, these stocks carry unique risks and are unlikely to show up in most ESG-orientated portfolios, valuations look relatively attractive, and I expect returns to exceed the overall market for this industry.”
A key tenet of value investing is building in a margin of safety – purchasing a security when the market price falls below its intrinsic value.
Huckstep said he knows institutional investors who have been underweight equities since 2010, waiting for that “attractive entry point” once a traditional margin of safety reappears.
“Today’s rates are still lower than long-term historical averages and the total savings per US citizen is higher than ever, leaving the market awash in liquidity relative to historical values and helping keep p/e levels higher than what long term historical averages might suggest as fair,” he said.
High p/e levels of growth stocks – especially technology companies – work on the assumption that someone else is prepared to pay a higher price in the future.
“I recommend that advisers stay fully invested with the majority of their clients’ money and avoid missing out on increasingly attractive dividend yields as the market settles on a new normal yield curve after fourteen years of Fed quantitative easing,” said Huckstep.
“Many of today’s bond investors – even many portfolio managers listed in the prospectuses of large mutual funds – have never invested in a yield curve environment that didn’t include QE, which started November 2008!”
‘Pessimistic but short of outright bearish’
When looking to the second half of 2022, Huckstep predicts a yield return on stocks of 1.2% and a price return of -4.5% from today’s value of 3,899, for a total return of -3.3% and S&P 500 price level of 3,723.
“If the yield on a 10-year treasury note ends the year at 3.75%, and the average premium for the stock earnings yield over 10-year treasury yields has been 1.89% over the last 25 years, we might end the year with a stock yield of 5.64%,” he said.
He added that if earnings on the S&P 500 get to 210, then the index might end at $3,723.
“Of course, there is very little chance of earnings, yields and premiums ending at these exact values, and there is a high probability of a black swan factor appearing and changing everything, leading me to be pessimistic but short of outright bearish on the rest of the year.
“I am recommending clients stay fully invested with currently invested funds but keep their excess cash out of the market for a little while longer,” he finished.
