Stocks Are Falling. Consider These Signs When Deciding Whether to Wade Into the Market.

One of the developments that have ended past bear cycles has been the Federal Reserve’s willingness to inject loads of excess liquidity to support asset prices and bolster domestic activity. But Gavekal Research’s Louis Gave in a note says this is unlikely to come to pass given the inflationary pressures the Fed is struggling with.

“Rather than being investors’ friend, the Fed has become a foe intent on tightening monetary conditions. One can debate how aggressive it will be, but the Fed is unlikely to help out soon,” Gave writes.

The prospect for some of the other factors that have helped end bear markets in the past also don’t look likely, according to Gave, including a collapse in energy prices that could stabilize the stock market, a meaningful decline in the U.S. dollar or assets that become so cheap that it draws deep value investors.

“Today, alas, it is hard to find many major assets that are available at fire-sale prices. This is probably because the unfolding bear market is too young and has yet to impose enough pain on investors,” Gave writes.

What could end the bear market? While Gave acknowledges it’s scraping the bottom of the barrel of possibilities, he offers up three to watch for: China ending its Covid lockdowns and unleashing a raft of stimulus to stabilize its economy—a move that would boost animal spirits in emerging markets though also likely push energy prices to new highs, Gave writes. 

Two other developments that could soothe markets: A peaceful resolution to Ukraine-Russia conflict, such as a compromise deal or regime change in Moscow could push energy prices down, helping stocks. On a similar front, a deal that brought U.S. adversaries Iran and Venezuela “in from the cold” could lower oil prices and act as a salve for stocks, Gave says.

With more pain likely for U.S. and global stocks, DataTrek Research co-founder Nicholas Colas told clients in a note that investors’ primary goal right now “should be to get to that point with a minimum of incremental damage to their portfolios.”

That means avoiding holding stocks or exchange-traded-funds that have made new 52-week lows, waiting instead for prices to level out for at least one to three months since cheap stocks and sectors tend to get cheaper when market valuations are being recalibrated lower, he says.

When should investors consider adding to stocks? Here, Colas tells Barron’s that markets don’t tend to hit a bottom in one day though—a reason Colas recommends investors buy a little at a time, or dollar cost average, into the stocks they like. For those looking for a sign, Colas says when the CBOE VIX Index hits 36, investors may want to add some risk and lighten up as it gets closer to 20. It’s currently at 32.75.

What to add? Since correlations tend to approach 1.0 at a bottom, Colas says a rebound tends to benefit just about everything to some degree so for those who don’t want to get into the weeds owning an index fund is a way to benefit from a bounce.

That said, the stocks that took the biggest hits on the way down tend to see the biggest bounces, Colas says. So that would mean technology but Colas says technology stocks “whose stories have been damaged” like Netflix (NFLX), Meta Platform’s Facebook (FB) and possibly Amazon.com (AMZN) may not be part of that bounce in the same way.

Others like Stephanie Link , chief investment strategist and portfolio manager at Hightower Advisors, has been advocating a barbell approach for months because of expected volatility in the market. In practice, that means owning both cyclical and value-oriented companies and quality with strong free cash flow, balance sheets, sound business models and excellent management. 

Starbucks (SBUX) is one of the companies Link has been adding to amid the declines, noting the coffee maker’s strong results in the U.S. and the $20 billion the company has to invest in people, stores and product from its canceled stock buyback.

Other companies Link favors: American Express (AXP), which is taking market share, seeing new growth from younger Gen Z and Millennials, and is poised to benefit from a recovery in travel and entertainment. Schlumberger (SLB) has a hidden technology story embedded in the energy company that can help generate double-digit earnings growth, she says. Plus, it just raised its dividend by 40%.

Write to Reshma Kapadia at [email protected]