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A correction in many stock markets has lagged behind, but solid fundamentals and corporate gains mean the current hesitation is a buying opportunity, according to Mehvish Ayub, senior investment strategist at State Street Global Advisors.
Wall Street recovered its losses Tuesday after U.S. Federal Reserve Chairman Jerome Powell said inflation was still “mild” and that it was committed to the Fed’s current accommodative policy.
Powell’s comments seemed to allay some of the concerns about impending inflation that have driven a sharp rise in U.S. 10-year Treasury benchmark yields and brought stock markets down from near-record highs over the past week.
Investors are concerned that a rise in prices due to an imminent package of federal stimulus, the restart of the economy and the accumulated demand from consumers, may force the central bank to raise the costs of short-term debt.
Speaking to CNBC’s “Capital Connection” on Wednesday, Ayub noted that changing financial conditions and improving growth and inflation expectations had caused U.S. 10-year yields to simply retreat slightly from the strong decline it saw between December 2019 and June 2020, when the Covid-19 crisis prevailed.
“I think the important thing to note is that the Fed has not suggested anywhere in its policy that it will remove all financial conditions. It has a goal of price stability and employment,” Ayub said.
He noted that core inflation (which excludes food and energy prices) is still slightly lower, indicating that the current rise in short-term inflation expectations is “likely to be transitory”.
“We were prepared for a correction in some cases, if we think about the speed and magnitude of the movements we have seen in global equity markets,” Ayub said. Generally, a correction is referred to as a 10% drop in an asset or market from its recent high.
Many of the technology megastocks that saw rising stratospheric stock prices drive the stock market recovery after the March 2020 recession have fallen victim to recent change, with investors looking for more cyclical stocks tending to align with economic conditions.
Mikhail Zverev, head of global equities at Aviva Investors, told CNBC on Wednesday that many of these growth stocks – those of companies operating a significant and sustainable positive cash flow, with higher future profits and revenue with a faster growth than peers in the industry – had benefited from the low interest rate environment
“There are a number of high-growth names that had a spectacular 2020, and certainly some of them were key, but many of them were positioned based on the view of lower and longer interest rates, and some I think are not there, A long time ago. “
Tesla is an example: it lost 8.55% on Monday on the worst day since September 2020 and left shares slightly since the beginning of the year. Still, Tesla shares continue to rise 162.5% from the March 2020 low.
“Over the last few weeks, if anything, we’ve had some really good foundations,” Ayub noted. “We’ve had some really good gains, especially if we look at the S&P 500.”
With around 80% of Wall Street’s flagship blue chip index companies reporting profits at this stage, the vast majority have met or exceeded profit expectations.
“The basics there are still good and in any case, I think this is an opportunity to buy into the dive,” Ayub concluded.