In that sense, the story did not disappoint. The ninth month of the year closed with falls of more than 9% for the S&P 500 index, the most representative stock index in the world. What happened is a reflection of all the imbalances in the global economy and the anticipation of the bad news that is just around the corner.
Within the first group, inflation is clearly higher than expected at this point in 2022 and the negative effects that this scourge is producing around global activity. Slowdown in demand, deterioration in corporate margins and a very tough monetary policy being carried out by central banks.
In the second group, that of the bad news to come, is what will happen with the impact on corporate profits and sales that will begin to manifest itself in the Wall Street balance sheet season from mid-October.
Until then, corporate results have been quite resilient in the face of existing global challenges. However, the recent quarterly numbers presented by FedEx (FDX) and Nike (NKE) anticipate that we could be facing a severe turning point in the firms’ profits.
In this context, the markets fell sharply this year, in what is one of the worst performances since 1930 to date. In this line, the current prices have incorporated all the film of the past, but we do not know how much of the bad future events.
What we are sure of is that the current correction in the stock markets has made it possible to accommodate valuations in relative terms with their history. At the beginning of the year, as a result of the large monetary issue and 0% rates, the market was really very expensive in relation to the earnings per share generated by its members. As the bear market wore on, that glut was corrected.
Currently, the S&P 500 trades at a future P/E ratio of 16.6x, down from the 17.3x average it traded over the last 32 years. Is that number attractive enough to increase the portfolio’s exposure to equities? It is premature to say so, especially if we consider that during the great periods of panic of the last three decades this indicator reached 11 times (eg 2008 and 2011).
Furthermore, there is a lot of investor skepticism as the world heads into the downturn phase of the business cycle. Although it is true to be would contradict in current times it may seem too daring, maybe it’s time to start looking at where the real opportunities are in the universe of actions.
Although the idea is not to be a hunter of the bottom of the market, we are sure that going forward we will have two things: more volatility and more downward pressure when we get into the season of presentation of corporate balance sheets. It is there that the portfolio opportunities and, to take advantage of them, you have to have a liquidity portion in the portfolio.
An intelligent way to apply said capital is through the strategy of staggering the entry points in the companies that have the best foundations and the most tools available to overcome the crisis and come out stronger.
Thus, being patient in the long term, taking advantage of the current scenario of financial stress, can be an interesting combination to capitalize on money in the coming years.
That is the message that all our clients receive at this time and from which we help them with analysis tools to manage the current turbulence in favor of their clients’ portfolios.
Head of Research & Strategy at Inviu
Source: Ambito
