Nicklaus: As bears prowl the stock market, ‘this will leave some scars’
(St, Louis Post Dispatch)
June 23, 2022 (David Nicklaus)
You might want to have a bottle of aspirin handy when you open your next 401(k) statement: The numbers will be painful.
The news from Wall Street has been dire all year, but this month the stock market officially entered bear market territory, down more than 20% from its peak. For investors who’ve been around a while, that milestone brings back memories of the dot-com collapse in 2000 and the start of the global financial crisis in 2007.
Both set off multi-year bear markets that knocked stock prices down by roughly half. Is this another of those voracious bears, or will it be a shorter-lived animal that’s content to consume less than a third of stocks’ value?
Kirk McDonald, a portfolio manager at Argent Capital Management in Clayton, leans toward the latter outlook. The indicators he follows points toward a continued strong economy, which should fuel higher corporate earnings.
We’ve never had a recession, McDonald said, when the yield curve slopes upward as it does now. That means long-term interest rates are higher than short-term ones, indicating a healthy appetite for risk.
He’s also encouraged that the housing market remains strong and that the price of copper, used extensively in manufacturing and construction, has held up well relative to the doom-and-gloom metal, gold.
“Investors are pricing in odds that we are going to have a recession,” McDonald said. “If we avoid a recession, it’s a tremendous opportunity because the stock market will start going up before the economy bottoms.”
Even as stock prices have tumbled, analysts continue to predict record profits this year. The S&P 500 Index now trades for about 16 times expected earnings, which is slightly below the 10-year average. At the start of this year it sold for 21 times earnings.
That doesn’t mean prices are done falling. “You tend to see an overshoot on the downside in terms of valuations in a bear market, so there may be some further distance to travel,” said Norman Conley, chief investment officer at JAG Capital Management in Ladue.
Still, Conley is finding more stocks that look reasonably priced, and he’s glad to see the Federal Reserve acting to combat inflation. “We’re probably in the zone where investors should be more opportunistic than fearful,” he said.
Joe Terril, however, remains bearish. The founder of Terril & Co. in Sunset Hills has trimmed his stock exposure dramatically this year and isn’t ready to tiptoe back in. One reason: He doesn’t believe analysts’ earnings forecasts.
“Corporate profitability is not going to be what people think it is,” he said. “The cost of doing business is going up for these companies, including materials, labor and freight.”
Terril also thinks the Fed and other central banks will need to raise interest rates a lot more to bring inflation under control. That raises companies’ borrowing costs, and it makes bond a more attractive alternative to stocks.
“I think people are missing the point that interest rates are going higher, and that means the entire stock market has to be revalued,” Terril said.
So, these three St. Louis investment pros have three views of where we are in this market cycle. One is optimistic, one’s feeling opportunistic and one remains a resolute pessimist.
While they watch for signs of the bear market’s end, they recognize that clients are just beginning to feel pain from their shrinking retirement accounts. “This will leave some scars,” Conley said.