(Please enjoy this updated version of my weekly commentary published March 7th, 2022 from the POWR Growth newsletter).
First, let’s review the past week:
Over the last week, the S&P 500 is down by 4%. Other than gold and oil, nearly every segment of the market is lower, especially over the last 3 days.
We often talk about the importance of interest rates and earnings in terms of equities. And, these do matter the most in the long run.
But, a third factor is risk appetites. This is basically a reflection of how people are feeling. This can cause wild swings in multiples during episodes of fear and greed.
It’s also the best explanation for how something like Peleton can be worth $8 billion in February 2020 to $70 billion in January 2021 and now is worth under $8 billion.
A great way to visualize ‘risk appetites’ is through the P/E of the S&P which hit 39 in December 2020. Currently, this figure is at 24. The S&P 500’s forward P/E of 19 is now below its 5-year moving average.
This development shouldn’t be surprising given that interest rates are rising along with inflation. The Russia-Ukraine situation has also exacerbated the situation in terms of adding to inflationary pressures and compressing risk appetites.
The demand for speculative and expensive stocks quickly dries up when the world is facing a crisis.
To sum up the situation: At this time last year, the market’s primary forces were all bullish. Earnings growth was trending higher, while rates were pinned at zero.
Now, earnings growth remains solid, but rates are now moving higher. And, we have this unpredictable, external event weighing on market sentiment.
Silver Linings
So, there are a couple of silver linings. The most important is that the Q4 earnings season was also strong. Entering earnings, analysts were expecting a 21% growth rate, but we ended at a 30% growth rate. For the next quarter, analysts are projecting 4% earnings growth, a much lower bar to beat.
Another positive is that sentiment-driven selloffs can quickly unwind and reverse with favorable headlines or news. A fundamental-driven selloff on the notion of a slowing economy would be more worrisome.
Finally, the market has discounted so much bad news and we are still only down about 15% from the all-time highs in early January. Some of the bad news now discounted are a much more hawkish Fed that’s willing to consider 50 basis point hikes and intra-meeting hikes if necessary.
The Russia-Ukraine crisis and all the spillover risks that brings. Skyrocketing energy prices and their potential impact on growth and spending.
Market Outlook
Despite this week’s price action being reminiscent of a bear market, I continue to believe that we are in a choppy market and are now visiting the lower-end of the range.
Just like last week’s bullish reversal ended in disappointment, I wouldn’t be surprised to see something similar happen to this recent move lower. Not a specific prediction, more just an observation of how these choppy environments work where any strength or weakness is quickly faded.
In a bigger picture sense, we remain in a bull market, and this is a pause or a healthy refresh that brings sentiment in better balance, leads to more attractive valuations, and creates bullish setups for the next phase of the bull market.
One point to follow-up from last week is that we speculated that the violent reversal on Feb 24 could have marked a bottom given the re-test and historical parallels. Based on last week’s price action, this scenario is not likely.
Strategy
In terms of our strategy, the focus was on finding a better balance between growth and cyclical stocks. The other aspect was to take advantage of market weakness to find opportunities in the travel sector as coronavirus cases continue to drop at a remarkable pace.
I continue to believe in both trades, but as I noted in the trade alert. Both of these are being put on pause as macro issues are more material.
What To Do Next?
The POWR Growth portfolio was launched in April last year and significantly outperformed the S&P 500 in 2021.
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The portfolio gets most of its fresh picks from the Top 10 Growth Stocks strategy which has stellar +48.22% annual returns.
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SPY shares . Year-to-date, SPY has declined -12.36%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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