Hedge fund experts and market strategists say the recent sell-off in the stock market could be the start of a recovery.
The Dow rose 618 points, or 1.98%, on Monday after Friday’s slump, reaching bear market levels. The S&P 500 rose 1.86% while the Nasdaq rose 1.6%.
The stock market slide has downgraded tech and biotech companies and has faced high inflation and inventory levels with a cluster of retailers as consumers began to reduce costs, including targets. (TGT) – Get Target Corporation Report) And Walmart ( (WMT) – Walmart Inc. Get the report)
Thomas Hayes, chairman of New York’s Great Hill Capital, told The Street that investors should stay in the market and buy high-quality companies in deeply traded sectors for fear of interest rates and further financial tightening.
“We were net buyers last week during a period of constructive and chaotic sales at these levels,” he said.
The sight may be a relief as some of the unusual margin calls sold in recent weeks have resulted in “forced sales” and the release of funds from investors who had excessive leverage, Hayes said.
The market could be near a bottom
The fund could be identified at the bottom of the market by a letter sent to its investors on May 18 by hedge fund Melvin Capital, he said.
“With Gabe Plotkin’s $ 7.8 billion Melvin Capital Fund and Tiger Global losing $ 17 billion in its tech holdings, most of the pain can now be in the rearview mirror,” Hayes said. “If you’re wondering why Amazon, Expedia and Uber are selling like they’re going out of business – now you know.”
A recent Bank of America Global Fund Manager survey shows that investment managers have the most cash balances since September 11, 2001.
The 5-year moving average in the S&P 500 is 18.6 times and the market is currently trading at 17 times 2022 earnings per share and 15.5 times 2023 consensus EPS.
Although it could be multiplied, interest rates “would have to go much higher to justify that level of multiple contractions,” he said. “The yield on the 10-year Treasury in 2000 was 6.82%, a big difference from last week’s shortfall of 3.2%. This is consistent with the peak before the aggressive reduction of 3.25% in October 2018 and 3.03% in January 2014. “
The market may be close to the bottom, but it has not yet reached it, Art Hogan, chief market strategist B Riley Financial, told The Street. The average stock of the NASDAQ Composite Index fell 40%.
“We’ve seen a lot of multiple contractions and combined with peak frustration, we’d suggest we’re getting closer if we’re not at the bottom,” he said.
The long-term average multiple of the S&P 500 reflects the return of the last 25 years to what it is currently doing business – about 16.6 times the forward earnings, 21.5 times less at the beginning of the year, Hogan said.
“If you go back 10 years, it’s an average of 18.5 times, so we’re two times less than the current average,” he said. “The S&P 500 component has less than 20% of the company’s transactions above their 200-day moving average. This number is 15% for the Nasdaq.”
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Investors’ attitudes are declining sharply – the American Association of Individual Investors (AAII) is at a low point that has not been seen since the Great Depression of 2008 and 2009.
“Institutional investors have the highest levels of cash in their portfolios at 08 and 09,” Hogan said.
Another pullback could happen
Greg McBride, chief financial analyst at Bankret, a New York-based financial data company, told The Street that one-day gains in the market are not evidence that the market could fall further. The chances of a recession are not off the table as inflation is still high.
“Unless there is conclusive evidence that inflation is going down again and the recession is not on the cards, it is too early to call a market collapse,” he said. “Even if the market returns to the level of January 3, if the recession is implemented in 2023, it will all go out the window.”
Market volatility is likely to continue and investors should face the possibility of another pullback, McBride said.
“Investors should be prepared for the ongoing volatility and uncertainty in the market throughout 2022 and 2023,” he said. “This is the equivalent of a four-decade high with inflation and a tougher policy of the Federal Reserve than we have seen in decades.” 2021 was an unusual year – a year in which the market grew, virtually uninterrupted and even without a 5% pullback at any time. “
Steve Sosnick, chief strategist at Interactive Brokers, told The Street that markets did not reach them because of the lack of macroeconomic conditions, such as the Federal Reserve.
“Everyone is asking if we hit the bottom,” he said. “If everyone is wondering if it’s safe to buy, then we haven’t hit the bottom line. The conditions aren’t there yet. Everyone is looking for a downward signal factor. Capitulation may not be.”
Sosnik said investors were panicked by the normal market conditions.
“People expect the market to recover,” he said. “Some of them have seen a market that was not supported by the Fed stimulus.”
Investors should follow Buffett’s strategy
Investors should spend their cash to act like Warren Buffett, CEO of Berkshire Hathaway, Hayes said.
The billionaire has spent a third of his cash reserves, or about $ 50 billion, on operations since the beginning of the year.
“While others were panting, Warren was shopping,” he said.
During the market downturn, Buffett’s Y (BRK.A) – Berkshire Hathaway Incorporated Class A Report (BRK.B) – stocks were bought in the Berkshire Hathaway Inc. Class B report and oil companies such as Occidental Petroleum – Oriental Petroleum) Which is one of the 10 largest holdings in Berkshire.
The conglomerate also bought more shares of Chevron, another addition to its original position that vaulted Conglomerate’s investment in the top four common stock holdings.
By the end of 2021, Berkshire Hathaway had spent $ 11.6 billion on insurance company Allegony (Y) – Allegheny Corporation reports. During the company’s annual April shareholder meeting, Buffett revealed that Berkshire gaming company Activision Blizzard owns 9.5% of its shares from its initial 2%, which will be purchased by Microsoft (MSFT) – Microsoft Corporation reports.