29 June 2022
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Is this stock market slump another buying opportunity?

Peter Switzer
15 June 2022

Tipping where stocks and markets go is not a precise science. Economics and financial markets are a part of academia called social sciences and the really hard bit to get your head around (even if you have a lot of grey matter inside that cranium of yours) is the behaviour of people who are in the social group called investors and speculators.

I’ve found the history of stocks to be a big help for the long-term investor and that’s even though that great investor Warren Buffett has pooh-poohed history when it comes to investing. Buffett has said: “If past history was all that is needed to play the game of money, the richest people would be librarians.”

I agree, history is not the only factor, but even from his own lessons on investing, it’s clear Buffett has some respect when those lessons about money and stocks come from history. For example, history has shown him that companies with good management are good businesses to invest in. And he clearly has relied on history when he advised anyone who was listening that you should “be fearful when others are greedy and greedy when others are fearful”.

Obviously, history can lead you astray. Anyone who looked at AMP’s old history could have invested in a loser, though its recent poor history was actually a good clue on what has happened to its share price of late.

AMP

Right now, the market is getting really negative based on history that big interest rate rises by central banks have created recessions. But it’s assuming the Fed’s Jerome Powell is a knucklehead, who’ll tighten rates too fast and create a recession. But what if he doesn’t? And what if it’s a mild recession, with lots of companies hardly affected? And what if it means less interest rate rises so the tech stocks sell-off is over-the-top?

Then the stock market will rise and these scary days will be seen to be excessive. I’m betting on that. But history actually shows that after a big sell-off there is a big buyback, and that’s what the long-term investor has to focus on, instead of being super worried right now.

The ‘here and now’ is worried about a recession because right now there’s no apparent peak in inflation, no Fed pause, no soft landing, no China lockdown easing, and no Russia/Ukraine resolution. 

But many of these negative issues could be very different and more positive in two or three months’ time.

I won’t bore you with details but signs of a slowing US economy are showing up. That could mean the Fed doesn’t play as tough a game as the market is guessing with interest rates. And some really smart people support my long-term positivity when I suggest being “greedy” sooner rather than later might be rewarding.

Like who?

CNBC pointed to “top Wall Street strategist Marko Kolanovic, who is sticking by his guns amid the sharp market sell-off, seeing the S&P 500 to rebound and finish flat” for 2022. What does this mean? The S&P 500 started the year at 4796, so if Joe is right then we’re talking a 27% rebound!

This is JPMorgan's chief global markets strategist in the Big Apple and who was ranked the No. 1 equity-linked strategist in last year's Institutional Investor survey in the US. And this is what he said last week: “We believe rates market repricing went too far and the Fed will surprise dovishly relative to what is now priced into the curve”.

CNBC says that “the strategist believes that investors have been too pessimistic on overblown recession fears, noting that the consumer remains strong on the back of economic reopening”. He’s positive on US consumer strength, COVID reopening/recoveries worldwide including China, and big policy stimulus in China.

Another respected US stock market commentator is Professor Jeremy Siegel of the Wharton School at the University of Pennsylvania. I’ve listened to this guy for decades and he’s one of the sharpest tools in the shed!

CNBC noted that Siegal said investors who buy now “won’t be sorry” a year from now after the market sell-off. “We’ve had bigger shocks in the pastThere may be another 5%, who knows, there may be another 10%, but that means for me, moving forward, that just raises the return on the market looking forward,” he said. “Hold in there. If you got cash, begin to employ it. You won’t be sorry a year from now.”

He argues that the S&P 500 beats inflation and given US inflation is 8.6%, that piece of history is worth noting.

“Through history, the S&P has beat the CPI by 4 to 5% a year. So really, it is way below its lag. So don’t forget in the long run, the evidence is we’re going to overcome that inflation with this stock index. It’s lagging its historical performance,” he said. “There may be downside... but let me guarantee you when this is over, the S&P will jump ahead of what the consumer price index is. That’s always the way it’s been historically.”

If you want to be spooked by headlines from people who are short-term players or media workers who need to follow the current stories, then that’s your choice. But I’d rather rely on some really smart people and a healthy chunk of market history.

This sell-off is a buying opportunity for a long-term investor.


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