Stock Market Recovery: Real Deal or Head Fake?

Jonathan Shenkman, financial advisor and portfolio manager, Shenkman Wealth Management: I absolutely believe long-term investors should be optimistic about the markets. While this is undoubtedly a challenging economic environment, it’s important to keep the big picture in mind. Although U.S. stocks are up since June, they are still off double digits from their all-time highs in December. This should be an attractive opportunity for investors with a multiyear time horizon. Since World War II, recessions have lasted only 11 months on average. On the long end, it was 18 months due to the Great Recession. The shortest, during the Covid-19 pandemic, was a mere two months. The Federal Reserve has gotten better at managing the country’s money supply. In short, there are safety nets in place to ensure that the bad times don’t last too long. 

Third, since 1926, after dividends are factored in, the U.S. market has been up approximately three out of every four years. There is a good chance that investors that are hiding in cash will miss the market rebound after a tough year. 

Investors should not underestimate Americans’ resilience and ability to adapt. During Covid, the economy could easily have shut down completely, but within a few weeks many companies were able to pivot, serve their clients virtually, and achieve record profits. I am confident that the management teams of many leading American companies will find creative ways to increase revenue and drive their stock prices higher. Historically, the markets tend to reward those who are optimistic. This time is no different.

Andrew Wang, managing partner, Runnymede Capital Management: Despite the recent rally, which has been very strong, and a better-than-expected inflation print, the negatives still outweigh the positives. Looking for signals through the noise, we’re likely to see a real growth slowdown over the next two to three quarters. I think investors should watch U.S. real GDP growth closely. If it continues decelerating, that makes for a difficult environment for even great companies. 

We also see increasing risk of a corporate-profit recession. Even if we’ve seen peak inflation, current levels are still high historically. I think that 8.5% inflation is nobody’s idea of healthy price growth. And inflation is putting pressure on corporate margins. Inflation also continues to negatively impact Americans’ incomes. Average hourly earnings, when adjusted for inflation, fell 3% in July from last year. This inflation and a more cautious consumer are challenges for companies in the retail sector. And because consumers power the U.S. economy’s growth, the impact may hit more broadly.

Kelly Milligan, managing partner, Quorum Private Wealth: We are still facing pandemics, high inflation, potential recession, Fed policy uncertainty, supply chain constraints, war in Ukraine, tension with China, and the looming midterm elections. I don’t feel optimistic about those headlines, and markets don’t feel “safe.”

But it’s hard to process the news of the day and ever feel wholly optimistic. Despite a lightning-fast bear market in March and the beginning of the Covid pandemic, 2020 was a great year for investments. The headlines in January 2020 were trade tariffs, possible impeachment, Brexit, election year uncertainty, negative yielding debt and slowing growth in China. The S&P 500 index finished 2020 up 18.4%. 

There are always negative headlines. Over time, investors are compensated for putting capital at risk despite all the negatives. Our best advice is to diversify, diversify, diversify—not just into stocks and bonds, but commercial real estate, private equity, private credit, infrastructure, and elsewhere. It’s the best defense against headline risk and markets that may never seem optimistic.

Alan Rechtschaffen, financial advisor and senior portfolio manager, UBS Financial Services: I think there is plenty of room to be optimistic here. And if enough people feel that way, that in and of itself is the best way to shift these post-Covid animal spirits and bring the markets to higher ground. Now, are we going to be in a bull market a month from now? Anybody who tells you they know the answer to that would be making it up. But my sense is extremely optimistic. 

The question is, how do you express a sense of optimism and be realistic about the fact that there are a lot of uncertainties out there? People are looking at things like the defensive sectors and value stocks, which tend to do well in periods of higher inflation. If you don’t want to play it as safe, look at the technology: The future could not be brighter in terms of the opportunities that are out there. But you have to deal with the fact that people have been scarred by the first half of the year, which was the worst market correction since 1970. 

Peter Shieh, senior wealth advisor, Citi Wealth Management: The July inflation numbers definitely looked much better, so that gave people hope that what the Fed is doing is working. Secondly, GDP is softening a little bit, which adds to hope that the Fed could slow down its interest-rate increases a bit. However, the Fed is still in a tightening cycle. And tightening 50 basis points instead of 75 is still a lot compared to prior tightening cycles—we’re jamming four or five years’ worth of tightening into just a few months. 

But this contraction is probably just beginning. GDP might actually get worse before it gets better. So if we’re looking at two quarters in, this could last four quarters or longer. And don’t forget that starting in September, the Fed is going to reduce its balance sheet by $95 billion a month. Usually two-thirds of the downside happens in the last third of a bear market. So if we’re only in the beginning phase of it, there’s potentially a lot more to come. I’m telling clients to use these opportunities. Be ready to reposition your portfolios. If you were caught with higher-valuation, higher-P/E, higher-beta type positions, this is almost a gift to allow you to reposition out of those and play a little defense.

Philip Malakoff, executive managing director, First Long Island Investors: The short answer is yes, I am if we’re talking about the next 12 to 18 months. With the market having rallied quite strongly over the past six or seven weeks, it’s probably due for a little bit of a pullback in the near term. But we’ve had a nice rally off the bottom. I think a lot of that has to do with the fact that things were very oversold. The change in direction was unanticipated, because of recency bias, the tendency of investors to look for momentum or entrenched sentiment. 

One reason for the change was the 10-year yield, which had spiked to 3.5%, cooled off unexpectedly: It went to almost 2.5% really quickly and then to 2.75% or so. Inflation has hopefully peaked; we’ve seen positive news there and we’ll see if it continues. 

Some are sensing the Fed could be less hawkish. In the long term, it’s interest rates and earnings that drive markets. And long-term interest rates seem to have stabilized. But the most important reason, along with interest rates, is earnings. In general, corporate earnings have been far stronger than everyone thought they were going to be. 

Editor’s Note: These responses have been edited for length and clarity.

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