Time to buy, sell, or wait? Among war, inflation, interest rate hikes, congressional gridlock, and everything else, what do we do as investors? Short answer – buy or wait. The fear gauge, VIX, is at levels not seen since the early days of the pandemic and the “taper tantrum” of 2018 before that (when the Fed started tightening the last time). In those instances, over the following 6 months the markets rallied around 40% and 16%, respectively.
The biggest losers in this current drawdown have been high growth tech companies and recent IPOs. Software companies are down about 25%, stocks that came to market in the last 2-3 years (IPOs) are down 38%, and ultra-high growth/new technology companies are down over 50%. In this segment of the market, this is more than a market correction, this is a market crash. Granted many of these stocks did not deserve the valuation they were trading at, so crashing from their dizzying heights was justified – an unprofitable exercise bike company worth more than Ford? But, just as always happens the baby gets thrown out with the bathwater. Quality companies booking solid profits like Salesforce, Netflix, Zoom, Twitter, Shopify, and Facebook have seen their stock prices cut in half despite onboarding millions more users, increasing revenues, and in many cases increasing their brands and market dominance.
An investor with long-term growth goals should be looking at buying companies and sectors that are solidly growing earnings and will be leaders of the future economy. Over the past few months, the only trades that seem to have worked have been in the energy sector (as oil and gas prices have risen – most likely from inflation and geopolitics). However, over the next year or two, or beyond, who do you think will grow earnings and innovation faster, a company like Chevron or one like Apple? I think the answer is obvious, yet Chevron is up over 36% since December and Apple is down 10%. Sector rotations and choppiness are normal in the short term, but macro trends persist and typically win-out over longer timescales.
Fear is very high right now, but the economy remains strong and resilient. And as economies and companies grow so do their share prices in general. Consumers make up 70% of US GDP and the most recent reports showed spending increased at its fastest pace in ten months. This comes at a time when inflation was at 40-year highs with fuel prices soaring, wages stagnated, investment portfolios were declining, and war was looming. It’s going to take more than fears of Fed rate hikes and geopolitical maneuvering to drive this economy into a recession. The recent choppiness in the market looks at the very least like a “wait and see” moment, if not a buying opportunity.