Dow, S&P 500 fears? Worrying about a correction is the wrong way to invest

The Dow Jones Industrial Average and the S&P 500 index have just suffered five consecutive days of losses and their worst weekly performance since the June wait. Investors entered the summer declining shares slightly and have come out of the summer with a similar sell-off period. Is there anything else? Is the big one about to fall, which have been waiting for stock market bears?

Many of the main factors mentioned for a possible liquidation are well known to investors, which means that it is more difficult to see how at this time they would be the ones to cause a correction. There is the delta variant. There is a reduction in the Federal Reserve in central bank policy amid a sudden slowdown in job and economic growth. There’s the latest political headline: a new fight in Washington DC over a corporate tax hike and a possible stock amortization tax to help fund President Biden’s spending plan.

And there’s the problem that has dragged stocks into all the new records set during this bullish market (and the bullish market that preceded, or in your opinion, was disrupted by the pandemic): stock valuations are high .

There are also short-term pressures to consider: the “seasonal sting” of the fall, which market strategists say is real, and the recent declines in the U.S. equity market of major Wall Street banks, which they could keep up the pressure on stocks, especially with the recent money coming into the retail investor market. But it’s always more likely that something investors can’t see coming (such as a pandemic) will trigger a historic market sale than anything investors already know.

This makes the technical indicators of the market and the historical performance of the S&P 500 a reasonable way to measure whether investor confidence will last the last round of sales.

For Keith Lerner, Truist’s co-investment director and chief market strategist, the history of the S&P 500 suggests that the bullish market is not over yet, even if it gains moderately.

Since 1950, there have been 14 years in which the market has grown by more than 15% until August. Stocks increased 4% more at the end of the year, on average, and increased in 12 of the 14 instances.

You have to wait for setbacks. The deepest decline in 2021 has been about 4%. This is not typical, according to Lerner’s review of the data. The only two years in the historical data set that didn’t see at least a 5% decline in the S&P 500 were in 1995 and 2017. And history says the gains that occur quickly must slow down. Lerner points out in his research to clients that the current bullish market has gained 102% in 1.4 years compared to the average bullish market gain of 179% in 5.8 years since 1950.

But following what Lerner calls the “weight of the evidence approach” in technical indicators and the macro environment, the message for investors (not for traders looking for all short-term moves) is that US stocks may still rise over the next six to 12 months.

In his view, last week’s losing streak isn’t afraid to worry after one of the strongest years starts a year in several decades. Often, when the market moves a lot, the automatic reaction is to say it has to turn negative, but Lerner says investors should not fear strength as long as they are backed by fundamentals. “A moving trend is more likely to stay moving,” he said. “The carousel of worries keeps changing, and when one concern is removed, another appears to take its place. There’s always something to worry about … there can always be something we’re not talking about today that can dodge us “.

Even if the black swan event does not materialize, this does not mean that there are no 3% to 5% corrections. “That’s the market admission price,” Lerner said.

It doesn’t mean investors should never make tactical moves, but he says it’s better for most investors to stay focused on the next big long-term move than the next one among traders.

The economy may not meet the harshest expectations for the “roaring 20 years,” but Lerner focuses on the fact that a slower expansion is not yet a recession and that stocks are up 85% of the time in periods of decline. ‘economic expansion. Shares are highly valued, but noted that the S&P 500’s price-to-earnings ratio has not been the new high this year, not even as the market as a whole has been.

“Valuations remain rich, so we don’t expect a big expansion in P / E and then its profit growth, so stocks can’t grow at the same rate.” But he added that after the fall of the pandemic, analysts had underestimated the strength of profits overall.

This happened after the recessions, it happened after 2009, he said: estimates are falling too much and corporate profits are coming back faster than expected as companies reduce costs and focus on efficiency. If the economy is still fragile now, it is in the midst of a sharp rebound in lows and GDP that generates more sales and more of those sales reaching the bottom line. “And that’s why we have record corporate earnings,” Lerner said.

Among the factors that should worry investors, growth moderation is one of them. After being positive for more than a year, the rate of economic surprises has been negative. “And deeply negative,” Lerner said. This is an indication that after a one-year period during which investors and economists were underestimating the strength and the figures exceeded estimates, now with Covid concerns and an economic slowdown, the data has been surprisingly low.

But this is not a red alarm. “It just means, from our point of view, getting things up to date. Expectations. But that’s a slowdown. We see a peak, but it will stabilize,” Lerner said.

Passing maximum growth does not mean weak growth and relative market opportunities continue to be a bigger focus than cheaper assets. “There are no‘ cheaper assets ’today,” he said.

Within the S&P 500, he sees relative opportunities. The S&P 500 as a whole has not been as strong as its highly weighted technology stocks in the last stretch until recent records. The S&P 500 equal weight index has risen less than 3% since last May as mega-head technology stocks led the way. This meant an investment since early 2021, when inflation trade caused cyclicals to surpass megacaps. And it means that as the stock market set new records, there have been underlying corrections within the stocks.

Money has not left the market until it returns to the huge balance sheet, cows of cash flows in technology that can continue to operate even in a slower economy. It’s a sign that investors have become a little more defensive even within the S&P 500. But it also means that if the current carousel of concerns doesn’t cause a sustained negative turn in equity sentiment, the S&P yields 500 can be expanded, Lerner said.

“The internal rotation is cumbersome,” he said. “We would be a bit inclined to have a balance between the two. It’s not so clear that investors should all be cyclical or growth … Expectations have been abruptly restored, so some good news can go through a long way. “

The earnings growth rate is likely to reach a peak soon, and Lerner says next year you’ll have much more challenging compensation for revenue than the exit from a pandemic-induced economic shutdown. But the growth of maximum profits is not the same as maximum profits. “The trajectory is higher,” he said. And, rather than trying to call the maximum gains, it remains focused on whether revisions to earnings estimates could be negative or not, and sees no symptoms or pattern in this market.

“If we get growth that comes a little bit and a peak in Fed housing and we can’t get a better fiscal environment, everything suggests the trend is higher, but in moderation, and that will inject volatility and some bigger gains and opportunities below the surface as opposed to the title index. “

This may be a gut check for investors circulating in the market in general, and in evidence of the sale that occurred last week, but Lerner advises any investor to remember what the famous manager of the Fidelity Magellan fund Peter Lynch went say once: “Much more money has been lost by investors trying to anticipate corrections than to them.”