The bear market has likely begun the process of finding a trough, but be aware that a major policy misstep could extend the decline. In coming months as market volatility crests, panicky investors will probably lose heart and sell, just when they should be thinking about buying stocks.
For courageous individuals who hold on, the S&P 500’s nearly 25% decline from its January peak boosts the prospects of higher longer-term returns. For example, large-cap domestic stocks are closer to reasonable values than they have been in years, and some global equity sectors are downright cheap.
Market behavior during this troughing process is often difficult to stomach. Not only are stocks already down roughly 25% or more, but the day-to-day volatility will probably rise, and losses may accelerate as the bear market churns to an end. Simultaneously, headlines and pundits will shout about further downside, endless inflation or imminent recession, and the inability of the economy to recover. Such periods are psychologically difficult, but they often bring the best buying opportunities for investors with courage and perspective.
- First, stock fundamentals decline below a “normalized,” or trend level, and companies cut costs to run lean through the tough times. This process creates “operating leverage” in profits so that a resumption of economic growth sets the stage for a cyclical recovery in profits.
- Second, restrictive policy becomes supportive of the profit recovery.
Investors with long-term perspectives should be ready. Opportunities are coming. They should identify sources of dry powder, including cash, that could be applied to equity markets as the troughing process unfolds. Applying dry powder, a de facto portfolio rebalancing, is an important means of enhancing long-term returns.
AMG does not try to time market peaks or troughs. Instead, it evaluates the conditions for improved returns relative to risks, and that analysis indicates that in coming quarters the trough will be found. For now, hold on to that dry powder but talk to your AMG advisor frequently about when to reload.
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