Why? Volatility is normal. And market corrections, defined as a 10% pullback from a recent high, are healthy and common events in any bull market.
But a correction doesn’t necessarily mean an even worse pullback is ahead. Few analysts are predicting a long and painful bear market ahead. This is when stocks fall more than 20% from recent highs.
“Corrections are a temporary setback to a long-term investment strategy, and about half of all corrections since 1966 have resolved within five months,” said James Solloway, chief market strategist at the SEI’s investment management unit, in a report last month. .
Solloway added that higher volatility does not mean there is “a high probability that we are heading into a bear market or a recession in the near future.”
“Ups and downs are an integral part of the investment cycle,” he noted.
Even a portfolio manager who manages a fund hedged against the big swings in stock markets isn’t expecting a big drop anytime soon.
Central banks have baffled investors by signaling in recent weeks that they may raise interest rates more aggressively than expected to curb rising inflation. But Cupkovic said he expects inflation to cool as the year progresses.
There should be “easy money for the next few years,” he said.
Cupkovic also dismissed the argument that a bear market is overdue. That’s because there was one two years ago, when stocks fell in March 2020 as the Covid-19 pandemic hit the US economy. Prior to that, stocks were skyrocketing.
“It’s been so sweet for investors. Stocks went up. There was more complacency,” he said. It’s no longer the case now. The VIX is more than 60% above where it was trading at the end of 2019.
Oil stocks are the new FAANG?
Along these lines, Exxon analysts have raised their 2022 earnings forecast by 16% in the past three months and raised their 2023 earnings targets by 20%.
“We are seeing this sector rotation into energy,” said Tony Minopoli, chief investment officer at Knights of Columbus Asset Advisors. “Stocks will follow earnings.”
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