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- I continue to expect a late Q4 rally will lift equities through year end.
- Improving inflation trends (finally).
- Q3 earnings not as horrible as widely expected (again).
- Anticipation that in 2023, Fed’s hawkish appetite will become
increasingly untenable into a weakening economy. (easier to talk tough
with commodity inflation, but harder with rising unemployment).
- Longer-term, S&P 500 cap-weighted does not look particularly attractive.
- Top 10 largest stocks comprise 26% of index and are expensive on absolute and relative basis.1
- Other 490 stocks are far cheaper…. excellent investment opportunities.2
- Recession or no recession?
- With so many stocks down 40% - 50% or greater, many reflect recession outcome already. (AEA adding from this group.)
- Not necessarily true for S&P 500 cap-weighted, given top ten as discussed above.
- Price targets on upside/downside provide healthy metrics for strategists/analysts.
- However, emotionally, investors’ recency biases preclude shifting their views on a dime.
- “Why sell that, it’s doing great” and “why buy that, it’s doing
terribly” ….classic recency bias, setting up for suboptimal results.
- In my opinion, dollar-cost averaging* into declines has a higher
probability of repeatable success versus trying to call lows. As
recently witnessed, historically, 20%-25% bear markets in indices:
- Can lead to further declines near-term.3
- Have produced roughly double the average longer-term returns in equities even if further decline occurs first.3
- Personally have deployed this strategy:
- Contacted my FA and added to my funds in June once S&P 500 was down 20%, and again this past weekend when down 25%.
- At SPX 3,345 (down 30%) will be calling again.
- Same methodology enacted in Q1 2020, with the same level of queasiness now as I did back then!
- In my opinion, the only consistency to equity investing is fear ➔
greed ➔ fear roller coaster. Styles, sectors, and regions of investing
get too popular, then too hated.
- AEA believes in unconstrained, core strategies. Flexibility allows us to buy fear and sell greed wherever opportunity presents. (Let the market dictate.)
- Seek to buy great companies when thrown overboard and fund from companies currently on pedestal.
- So where are fear and greed currently? As per B #1 above, top ten are still on a pedestal. Additionally:
- Consumer sentiment hit all-time low in July.4 Lots of fear. A host of high-quality consumer discretionary stock prices reflect this.
- Crude oil futures have gone from below $0 a barrel (high fear) in
2020 to $90 today. Energy stocks are up on the pedestal as well.
This bear market is painful.
So is being a Chicago sports fan: Bears, Cubs, White Sox.
Chicago, and investors, need the Bulls.