By Alonso Munoz
Alas, Q1 earnings season starts in earnest this week. Analysts expect encouraging numbers out of corporate America in the midst of soaring inflation and the ongoing conflict in Ukraine. With so much “doom and gloom” being reported by financial media lately, we wanted to provide a few potential upside catalysts for markets in the near term.
History shows that equity markets typically perform well post Federal Reserve rate increases. Going back to 1990, there have been 5 rate hiking cycles. Equity indexes were up sharply the 6 months following those cycles 80% of the time. We believe that an already battered equity market could move sharply higher as the Federal Reserve continues to clearly articulate future rate setting plans.
Bottom line: Investors could do more harm than good by attempting to time the volatility; missing out on any upside potential.
The economy is strong, the labor market is tight, and unemployment numbers are at historic lows. Savings rates in the US are close to all time highs. Households accumulated nearly $2.5 trillion during the pandemic.
Bottom line: We think that continued leisure and travel spending can help buoy the economy even as fiscal and monetary policy turn more hawkish and inflation roars.
Interest rates are still at historical lows. When taking into account inflation, real yields are negative and fixed income markets are not yet presenting investment opportunities. Because of this, we believe that riskier assets present the most appealing investment opportunities.
Bottom line: Market participants will not simply sit on the sidelines and wait for all of the macro events to correct themselves. Equities, in our opinion, are currently favored by institutions, pensions and retail investors and a disciplined investment approach could reap rewards in the long run.
From a technician’s perspective, stocks are oversold. Since the invasion of Ukraine, institutions and retail investors have been dumping riskier assets. Valuations look more attractive for growth and mega cap tech stocks. Short positions may soon need to cover their bets, adding jet fuel to future upswings. Per Bloomberg’s Chief Equity Market strategist, Gina Martin Adams, “Despite conventional wisdom, fears of an economic slowdown combined with the Fed’s tightening of monetary policy may only intensify the historically positive effect of earnings seasons. Indeed, higher weekly returns during earnings seasons are usually stronger when the Fed is not easing, or economic confidence is low or both.”
Going back to Warren Buffett’s investing motto, “Be greedy when others are fearful and fearful when other are greedy“. Our investment committee continues to approach this market with discipline and conviction. Trusting companies that you believe in and understand can create long term, generational wealth.
To contact the author of this story:
Alonso Munoz at alonso@hamiltoncapllc.com
