Hedge fund experts and market strategists said the recent sell-off in the stock market could be the start of a delay.
The Dow rose 618 points, or 1.98%, on Monday after Friday’s slide into bear market territory. The S&P 500 was up 1.86% while the Nasdaq was up 1.6%.
The slide in the stock market has sent tech and biotech companies down along with a host of retailers facing rising inflation and inventories as consumers begin to cut back on spending, including Target ( (TGT) – Get target company report) and Walmart ( (WMT) – Get a Walmart Inc. report.).
Thomas Hayes, chairman of Great Hill Capital in New York, told TheStreet that investors should stay in the market and buy quality companies in sectors that are trading at a huge discount due to interest rates and fears of further monetary tightening.
“We are constructive at these levels and were net buyers last week during the erratic sell-offs,” he said.
There may be relief on the horizon as some of the selling in recent weeks has been the result of “forced selling” of abnormal margin calls and refunds from highly leveraged investors.”
The market may be close to the bottom
He said the market bottom could have been discerned with a May 18 message that hedge fund Melvin Capital sent to its investors that the fund would be closing.
“Between Gabby Plotkin’s $7.8 billion Melvin Capital fund and Tiger Global’s $17 billion loss on its tech holdings, a lot of pain may now be in the rearview mirror,” Hayes said. “If you’ve been wondering why Amazon, Expedia, and Uber are all selling like they’re going out of business – now you know.”
A recent survey of global fund managers at Bank of America shows that investment managers have the highest cash balances since September 11, 2001.
The 5-year average multiplier in the S&P 500 is 18.6 times and the market is currently trading at 17 times EPS for 2022 and 15.5 times for the consensus 2023 EPS.
He said that while the multiples could go down, interest rates “have to go up a lot to justify this magnitude of the multiple deflation.” The yield on the 10-year Treasury was 6.82% in 2000, a big difference compared to the short yield of 3.2% last week. It is in line with the peaks in October 2018 at 3.25% and January 2014 at 3.03% before pulling back strongly.”
The market may be close to the bottom, but it’s not quite there yet, Art Hogan, chief market strategist at B Riley Financial, told TheStreet. The average stock in the Nasdaq Composite Index is down 40%.
“We’ve seen so many multiple contractions and taken it with peak pessimism, we’d suggest we’re approaching the bottom, if not the bottom,” he said.
Hogan said the average long-term multiplier for the S&P 500 going back over the past 25 years reflects what’s currently trading — about 16.6 times forward earnings, down from 21.5 times at the start of the year.
“That’s exactly what if you go back 10 years only at a multiplier of 18.5 times, so we’re two times less than the contemporary average,” he said. “The S&P 500 has less than 20% of its component company trading above its 200-day moving average. That number is 15% for the Nasdaq.”
Go to follow
Investor sentiment has plummeted quickly – the American Association of Retail Investors (AAII) has reached its lowest levels not seen since the Great Financial Crisis of 2008 and 2009.
“Institutional investors have the highest cash level in their portfolios going back to 08 and 09 as well,” Hogan said.
Another withdrawal could happen
Greg McBride, chief financial analyst at Bankrate, a New York-based financial data firm, told TheStreet that a one-day gain in the market is not evidence that further market declines are likely. The prospects of a recession are not on the table because inflation rates are still high.
“Unless there is irrefutable evidence that inflation is trending lower and a recession is out of the question, calling a bottom in the market is premature,” he said. “Even if the market returns to January 3 levels, it will all be put out in the event of a recession in 2023.”
McBride said the market turmoil is likely to continue and investors should face the prospect of another pullback.
“Investors should prepare for continued volatility and uncertainty in the markets throughout 2022 and into 2023,” he said. This is on par with the trajectory of inflation at its highest levels in four decades and the Fed’s tightening policy at a faster rate than we have seen in decades. 2021 was an anomaly — the year the market goes up, virtually uninterrupted and without even falling 5% at any point.”
Steve Sosnick, chief strategist at Interactive Brokers, told TheStreet that markets haven’t bottomed out because macroeconomic conditions such as the Federal Reserve being more flexible don’t exist.
“Everyone is asking if we’ve reached the bottom,” he said. “If everyone is wondering if it’s safe to buy, we haven’t hit bottom. The conditions aren’t there yet. Everyone is looking for factors to point to the bottom. Maybe the capitulation hasn’t happened.”
Sosnik said investors were spooked that the market’s normal state would rise.
“People are expecting a rebound in the market,” he said. “Some of them have seen a market that was not supported by the Fed’s stimulus.”
Investors should follow Buffett’s strategy
Hayes said investors should put their money to work like Warren Buffett, CEO of Berkshire Hathaway.
The billionaire has spent about a third of his cash stock, or roughly $50 billion, working since the start of the year.
“While the others were vomiting, Warren was shopping,” he said.
During a market downturn, Buffett’s Company (BRK.A) – Get a Report on Berkshire Hathaway Inc. Class A (BRK.B) – Get Berkshire Hathaway Inc. OXY) – Get Occidental Petroleum’s report which is one of Berkshire’s 10 largest properties.
The group also bought more shares in Chevron, which was another addition to its original position that jumped by investing in the four largest holdings of common stock in the conglomerate.
Through the end of 2021, Berkshire Hathaway has spent $11.6 billion on insurance company Alleghany (Y) – Get Alleghany Corporation Report. During the company’s annual shareholder meeting in April, Buffett revealed that Berkshire owns 9.5% of the shares of gaming company Activision Blizzard from its initial 2% stake, which Microsoft (MSFT) is set to buy – get Microsoft report.