While misery may love company, it is bad for the health of your investments.
The company share is easy to prove. Just look at The Cure, those purveyors of doom and gloom from the 1980s who recently wrapped up a very profitable summer tour. While the success may not have resembled Taylor Swift, it showed that there’s still a demand for songs about emptiness and boredom. Still, even Robert Smith, the band’s lead singer and main songwriter, knows there’s a time for “Doing the Unstuck” — a song with the chorus “Let’s get happy!” — even if it causes confused looks.
This columnist, too, can ponder what can go wrong for the markets – and the world. When stock prices fall, as they did last year, it’s easy to remain bearish despite signs of a turnaround, or to dismiss a rise as nothing more than a bear market rally. There are so many risks these days – from bank failures, an aggressive Federal Reserve and still-too-high inflation, to geopolitical tensions with China, war in Europe and catastrophic weather – that we want to bid for membership among the respected permanent bears of the world .
It certainly felt that way last week as Moody’s grappled with US bank finances, the US imposed restrictions on the flow of money into China, and Nvidia (ticker symbol: NVDA) and other high-profile tech stocks swooned. Moreover, any surge, like the one that initially came after last Wednesday’s better-than-expected 3.2% rise in CPI, has been met with willing sellers. It felt like a moment to turn up the volume on The Cure’s “Disintegration” and bask in the hopelessness of it all.
And there’s evidence that many investors feel the same way, despite the rebound in indices such as the American Association of Individual Investors’ sentiment survey, which shows 45% of investors describe themselves as optimistic. Savita Subramanian, head of U.S. equities and quantitative strategy at BofA Securities, notes that the bank’s clients are still focused on what could go wrong, including consumer capitulation in the face of higher interest rates, tighter lending standards that… Economic growth undermined, and a bottom
cboe volatility index,
or VIX, which could rise sharply.
Advertisements – Scroll to continue
“The mood has shifted from deep fear and disgust to something warmer,” she writes. “But skepticism prevails.”
And that’s a problem. Persistent gloom is a lousy way to make money in the stock market, at least in the US
SPDR S&P 500
An exchange traded fund (stock exchange symbol: SPY) is one of the easiest ways to invest in the benchmark index. While last year’s 18% drop was painful, for longer-term investors, it was just a stumbling block in the way. The ETF has delivered remarkably consistent returns, whether it’s the 12% annual return over the past three years, the 12% over the past 10 years, or the 16.5% in 2023.
None of that means being a Pollyanna. Markets are about the pricing of risk, and sometimes risk is mispriced. And since markets are ever-changing, active investors should always be thinking about what can go wrong, when to take profits, and when it’s time to reinvest. Little did investors know that as August — one of the most difficult months for stocks — was beginning, knowing that stocks like Nvidia and Palantir Technologies (PLTR) seemed overwhelmed and that a pullback might be in order.
Advertisements – Scroll to continue
There are always ways to mitigate the risk we are concerned about. Take the low VIX, which is worrying some investors. Subramanian from the BofA points out that the so-called fear index has no mean reverting effect, which means that what goes down does not necessarily go up. Although the index has risen to 14.84 this week from 13.63 at the end of July, it remains well below where it was in March.
Based on the slope of the yield curve, Subramanian expects the VIX to bottom in the first quarter of 2024 at the earliest. However, those worried about a resurgence in volatility also have a choice. “Timing is difficult, so we favor quality stocks to hedge against an earlier VIX rise,” she writes.
The
iShares MSCI USA Quality Score
ETF (QUAL) and the
Invesco S&P 500 quality
Both ETFs (SPHQ) offer a solid way to gain exposure to quality stocks.
If the tech boom that’s propelled the market this year is indeed coming to an end, investors might want to consider Growth At A Reasonable Price (GARP). Jefferies strategist Desh Peramunetilleke warns that switching to value stocks probably doesn’t make sense just yet, but buying stocks that are cheap due to their growth and have earnings momentum does.
Stocks with these characteristics share many of the same characteristics as the big tech names that have propelled the market higher, but come at a much lower price, which could help them withstand valuation pressures. GARP stocks highlighted by Jefferies include banking giant JPMorgan Chase (JPM), cybersecurity firm Palo Alto Networks (PANW), Delta Air Lines (DAL), WW Grainger (GWW),
Advertisements – Scroll to continue
Alphabet (GOOGL) and Vulcan Materials (VMC).
GARP may not be as fashionable as Gothic, but it could be a lot more profitable for investors.
write to Ben Levisohn at [email protected]
Comments are closed.