Sell? No Way – This Is A Buyers’ Stock Market

Don’t let opportunity slip away. The last two weeks saw media negativity increase. However, economy reports and stock market actions hint at a rebound ahead. Here are the key items to keep in mind…

First, this mid-quarter timing is traditionally an excellent time to act: buy, sell and rebalance. The important quarterly earnings reporting is mostly completed. Fund managers are unconstrained, with a full 1-1/2 months remaining before they need to worry about the holdings in their quarterly reports.

Second, May is a great month to be optimistic in the northern hemisphere. Late spring and summer await, when spirits are lifted by weather, outdoor activities, vacations and generally relaxed attitudes. Then follows fall into winter, marked by major holidays ending with the launch of the new year: 2023.

Third, remember that Wall Street attempts to forecast ahead by about six months. Therefore, expect third and fourth quarter growth analysis to increase in importance as the second quarter winds up. At summer’s end 2023 becomes an important stock market driver.

Fourth, the media continues to apply its slap-dash reporting of economy releases. Worse, the count-the-hits website mindset means any analysis starts with the search for “exciting” (AKA “worrisome”) numbers, comments and contrasts. That’s how the good news in the May 11 CPI release was widely reconfigured to look bad.

Fifth, rules of thumb are mistakenly taken as absolutes now. Hence, all the discussion about the S&P 500 about to be in a bear market because it almost meets the “down 20% rule.” A bear market is a major downward adjustment in the stock market, often to drive out excesses. Sometimes it represents a growing concern about a recession that may or may not come to be. The point is, it begins when these issues initiate a downturn. It ends when the adjustment is completed – like now.

Now to the key facts about this 5-month bear market

Hitting the 20% down mark does not make the 5-month fall a bear market. This bear market started in late 2021, driven both by 2021’s bullish excesses and the increasing concerns about inflation.

Examples of what could be seen at the beginning: “Here Comes An Inflationary Storm Like None Before” (Nov. 24) and “Dual Bond And Stock Bear Markets Look Likely” (Jan. 18)

MORE FROM FORBESHere Comes An Inflationary Storm Like None BeforeBy John S. Tobey

MORE FROM FORBESDual Bond And Stock Bear Markets Look LikelyBy John S. Tobey

In other words, this has been a bear market for five months because of its causes and characteristics – not because it hit some numerical “rule.”

Very importantly – That understanding leads directly to why this stock market offers an excellent buying opportunity. It’s a healthy stock market that has adjusted down 20% without the financial system exhibiting strain, the economy showing weakness and business revenues slipping.

“What about Walmart and Target significantly missing their earnings estimates?”

There are interesting points about those misses:

Blaming the potpourri of inflation, inventory, supply and interest rates for their February-April results smacks of defensiveness. It isn’t like any of those issues suddenly popped up in the quarter. Think back on Procter & Gamble’s successful strategy to deal with those items.

So, what happened to costs at Walmart and Target since their revenues were fine? Walmart added the excuse that early returnees from Covid leaves created higher than expected labor costs. Target said customers surprisingly bought more low profit-margin groceries and less high profit-margin goods.

Then there are the analysts. Why were they sitting on their hands while these adversities were happening? If Walmart and Target did not discuss the items and adjust their guidance, shame on them. If analysts dismissed the companies’ concerns (unlikely), shame on them. The point is, those earnings estimates were big misses because they were flawed.

So… Do not take Walmart and Target as indicators of consumers pulling back or the economy deteriorating. Instead, expect management to be working overtime to cure what went wrong. They don’t want the current quarter and the next to be repeats. (This is why “contrarian” investors are willing to buy an ugly, beat up stock – because it behooves management to fix what broke.)

The bottom line: Remember that a buyers’ market (when the wish, “buy low,” can be fulfilled) rarely feels like a good time to buy

Successful investing requires being uncomfortable at important times. “Sell high” is hard because the stock market is the one place where a “good buy” is defined as a stock with a price rise. Conversely, this “buy low” stock market, selling for 80 cents on last December’s dollar (with many stocks even cheaper), is viewed skeptically and fearfully.

I’ve seen even good investment managers get caught waiting for the bottom that never comes. A common delay mantra used by individual investors is “wait until the dust settles.” The problem is, when skies are clear and risk seems tamed, prices will be far above today’s lows.

So, be courageous and act when it’s scary to do so.