UBS Analyst Says This Is When Investors Should Buy the Dip

Even though mid-term election results and encouraging inflation news have pushed U.S. stocks to their highest levels since August, a prominent UBS analyst says a recession is due and the global economy will continue to decline and that markets will fall another 16% before they bottom out.

A team of UBS analysts led by chief economist Arend Kapteyn said in a note to clients published last week that weak corporate earnings and continued interest rate hikes by the Federal Reserve will continue to hammer stocks for the rest of the year and into at least early 2023 before the market bottoms out with the Standard & Poor’s 500 index dropping to 3,200. At that point, if the Fed’s Open Market Committee turns to cutting rates, stocks would improve but not a lot – the U.S. economy would be in recession at that point, the note said.

Even then, Kapteyn wrote, investors will need to remain patient. Regarding the S&P 500, “We expect it will not regain its January 2022 high of 4,796 before the end of 2025,” Kapteyn said.

If accurate, Kapteyn’s analysis suggests that investors should avoid a rising post-election market that will turn into a bear trap, while anyone hoping to buy the dip will need to wait quite a bit longer.

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When to Buy the Dip?

According to Kapteyn’s analysis, we still have a few months to go before the market bottoms out. Then, perhaps, investors can buy the dip.

“Weak growth and earnings drag the market lower before a fall in rates helps it bottom at 3,200 in Q2 ’23 and lifts it to 3,900 by end ’23,” Kapteyn wrote.

As of Nov. 1, the S&P 500 was down more than 19% year-to-date and had dropped by more than 23% earlier in the fourth quarter. A further decline to 3,200 would have the index falling by 15% from its Nov. 9 close of 3,748.57.

Once the Fed stops raising interest rates to fight inflation and starts cutting them to respond to the expected economic weakness is the point where stocks would bottom out. By that point, however, Kapteyn expects economic growth to be flat or in recession, a development that would hurt corporate earnings and most likely prevents stocks from rallying.

Story continues

Policymakers believe the Fed will likely stop raising rates at some point in the first half of 2023. At that point, it’s possible the market will have bottomed out.

The team behind the UBS note predicted global GDP will increase just 2.31% next year, which would be the third-smallest growth rate for the last 30 years.

“Our forecast approaches something akin to a ‘global recession,’ ” the note said. “For the US, we now expect near zero growth in both 2023 and 2024, and a recession to start in 2023.”

That would drive the Fed to cut rates from the current level of 3.75%, a move the analysts expect would push the S&P 500 to 3,900 by the end of next year.

“Combined with inflation falling rapidly, the Fed would cut the federal funds rate down to 1.25% by early 2024,” the note said. “The speed of that pivot will drive every asset class next year.”

The last official recession in the U.S. took place during a two-month period in the first half of 2020 during the COVID-19 pandemic, which sent stocks plummeting. The S&P 500 opened the year at 3,245, fell below 2,450 in March, then rebounded to end the year at 3,756.

Bottom Line

UBS Chief Economist Arend Kapteyn said in a note to clients published that weak corporate earnings and continued interest rate hikes by the Federal Reserve will continue hurt stocks the rest of the year and into atearly 2023 before the market bottoms out. At that point, it may be possible to buy the dip.

Tips for Successful Investing

• A financial advisor can help you recession-proof your portfolio, while still growing your money. Finding the right financial advisor is made much easier with SmartAsset’s free tool. In fact, it can match you with up to three financial advisors in your area in five minutes. Get started now.

• Your investing strategy should account for the possibility of a downturn, which is why your asset allocation should be more conservative as you approach retirement. By reducing your exposure to stocks, you can avoid the possibility of your retirement accounts taking a big haircut right as you need them. If you’re still in the market when a recession hits, consider these five things to invest in during a recession.

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