“The underlying US economy is going to be okay,” assures Jeff Erdmann, a 37-year Merrill Lynch veteran and Forbes/Shook Top Advisor with $12 billion under management. “We’re going to fix the supply chain situation and we’re going to have energy prices stabilize at some point. No one knows when these things will correct themselves, but I don’t think this bear market cycle lasts as long as others have.”
Erdmann’s positivity comes as the S&P 500 is down 23%, the Nasdaq Composite is down 32%, inflation is raging at 8.6% and recession worries are running rampant. Yesterday, Federal Reserve Chairman Jerome Powell raised the Federal Funds rate by 75 basis points to 1.75% and overnight the UK and Sweden’s central bank raised their benchmark interest rates as well.
“I was a lot more scared at the beginning of the pandemic, during the financial crisis and during the dot com bubble. Those were radical excesses in markets,” Erdmann says.
Erdmann, who was the top ranked advisor nationally last year, as well as many economists and advisors across the major firms on Wall Street are striking a positive tone despite the recent drawdown.
Kathleen Malone, a Forbes/Shook top advisor with Wells Fargo WFC tells clients that while this market dip has been larger than anticipated, a correction was expected and is a natural part of the economic cycle. She also likes to point her clients to the outsize returns of 2019, 2020 and 2021 to show that it was inevitable that some of that surplus would be given back.
Amidst this turbulence, investors are wondering whether a recession is in the offing. While Erdmann is non committal, he highlights that there has never been a recession with future earnings growth in the S&P 500 or with unemployment as low as the current 3.6% rate.
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This recent sell off marks the 20th bear market of past 140 years, according to Bank of America BAC data. In past bears, the average peak to trough decline for the S&P 500 was 37.3% and the average duration was 289 days. If applied to the current market that would mean today’s bear market would end on Oct. 19 and the S&P 500 would sink as low as 3000.
“We’re in the bottom of the eighth inning of a very textbook, cyclical bear market,” says Lisa Shalett, chief investment officer of Morgan Stanley MS wealth management. “This is what happens when policy changes as rapidly and radically as it has, interest rates move up and price to earnings ratios move down.”
Shalett expects the repricing of rates and valuations to lead to a slowing of the economy and earnings expectations to come down as the bear market continues. With inflation, the war in Ukraine and a hawkish Fed already priced into the markets, she surmises that the market continues to drop because of concerns over corporate earnings which she characterizes as the next shoe to fall. Once expectations are cut and the resulting drop takes place, Shalett thinks that will mark the bottom and allow the market to return to what she describes as a “secular bull market.”
As far as timing, Shalett sees a reset on earnings expectations following Q2 and Q3 reports in July and October to be followed by a year-end rally amidst lower inflation and as a midterm election likely shifts the balance of power in Congress. Combined with better economic data from China and globally going into 2023, Shalett foresees the year ending on a much higher note than the present uncertainty.
Despite the cautious optimism on Wall Street, the University of Michigan Consumer Sentiment Index reached a record low earlier this month.
“Every gym and delicatessen has CNBC on and there’s so much focus on the short term,” Erdmann adds. “There is a lot to be concerned about that will bring headwinds to the market, but this is not a massive unwind.”
Erdmann pointed out that while investors are feeling pain, there has not been large scale capitulation in the market with investors running for the doors, a sign that would be ominous and potentially take wind out of his sails. Conversely, Erdmann sees large scale bearish sentiment amongst investors as a sign to be bullish.
Bill Carroll, who oversees 3,000 financial advisors as the managing director of UBS wealth management in the eastern division, echoed that sentiment saying that he hasn’t seen the mass panic he saw during other financial crises. Carroll says this is reassuring for the markets but also shows that investors are more sophisticated than in any time during his 37-year career.
“People feel very negative about owning financial assets right now and historically that has been a very bullish sign,” Erdmann adds. “I am not telling people to get bullish today but when you talk about how people feel, that’s already priced into the market.”
Wells Fargo Wealth and Investment Management CIO Darrell Cronk is less optimistic about the outlook in the short run, preaching a defensive posture for investors in the second half of the year until conditions change. He expects the U.S. economy to begin contracting in Q4 and continue to do so for two to three quarters for what he describes as a “mild and relatively short” recession.
While the market outlook over the short term remains unclear, Bank of America Private Bank CIO Joseph Quinlan points out that every U.S. recession has yielded a strong economy in the aftermath as evidenced by Bank of America data showing that the average bull market following a bear market lasts 64 months and yields a 198% return.