There is still no alternative to stocks.
That’s according to these hi-lights from a Bloomberg news story that outlines five reasons why calmer sailing may be soon at hand after a rocky journey for equities so far this year.
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After an initial selloff at the beginning of the year, the S&P 500 Index is close to flat since Jan. 28, but with some significant swings in between.
When the market has sold off, investors have found reasons to buy the dip.
Here are five reasons often cited.
1. The economy is solid and unemployment is low.
- Despite all the talk of interest-rate curve inversions leading to a recession, the U.S. economy remains strong, which could provide a tailwind to companies and their stocks.
- Economists expect the U.S. economy to expand by 3.3% in 2022, according to a Bloomberg survey.
- The March unemployment rate was 3.6%, the lowest since before the pandemic.
- The S&P Global U.S. Composite PMI for March was 57.7, well above the 50 level which marks the line between expansion and contraction.
“The risk of recession is really no higher right now than it normally is. I still think we are in an inflationary boom type of economy and I think that’s more or less going to persist for the next 12 months,” said Neil Dutta, head of economics at Renaissance Macro Research.
2. Inflation may have peaked.
- Stocks tend to underperform in high inflationary periods and the uncertainty surrounding just how hot this current bout may run has spooked many investors.
- A deceleration in the rate of inflation could provide investors the necessary confidence to buy into the stock market.
- The Consumer Price Index for March was 8.5% year-on-year, a 41-year high.
- Bloomberg Economics sees March CPI as the peak for 2022.
- Nuveen Chief Investment Strategist Brian Nick also expects that inflation has peaked in March and is:
“Encouraged that we are seeing the energy prices come down, that means less pass through to other areas of the economy like core goods where we could see some impact from those higher energy prices.
By the end of the year we are not going to be back at 2%. If we are at 4% or even a bit below that for core inflation, I think that will be job well done on the part of the Fed,” he said in a Bloomberg TV interview.
3. 1Q earnings are set to impress.
- Credit Suisse expects 1Q EPS to grow at 19% to 21% ex-financials, including surprises.
- Early 1Q reporters have beaten EPS by an average of 6.7% excluding large misses from Carnival Corp. and Lennar Corp..
4. The Fed has reached peak hawkishness.
- The Fed has already pivoted significantly on rate hikes and balance sheet runoff.
- Given the time it takes for policy changes to work through to the real economy, it is unlikely that the Fed will risk an overshoot in 2022.
- If the Fed were to get even more aggressive than it currently is signalling, it might run the risk of derailing the economy.
5. TINA (There is no alternative)
- Short-term bonds are selling off on the Federal Reserve’s plans to raise rates.
- Long-term bonds are lower as the Fed reduces its balance sheet, which also has sent mortgage rates higher, making housing investment less appealing.
- Cash is a wasting asset with inflation running above 8% year-on-year.
- Because of all this, stocks have become the default investment.
“Cash just becomes a place to park your money while you wait for the dip and then try to buy it; if we’re all doing that, the dips aren’t very long and they are relative limited by this highly inflationary but low interest rate environment,” said Citigroup Chief Global Equity Strategist Robert Buckland in an interview in late March.
“We might get dips, we might get corrections,” but “there’s all that cash on the side thinking I’ve gotta get back in to prop things up. So I’m not necessarily super bullish, but I don’t think these dips can turn into a bear market,” he said.
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