An emotional sell creates buying opportunities in these stocks

Volatility is back, and recent geopolitical events and movements in commodity markets have pushed equity indices lower over the past month. While more than enough to raise investors’ collective blood pressure, the rapid pullbacks have also created opportunities for long-term focused investors.

the


S&P500

The index has lost around 5% since mid-February, when markets began to worry about an impending Russian invasion of Ukraine. Energy, metals and grain prices soared. The S&P 500 and Dow Jones Industrial Average are each down about 10% from their highs set earlier this year, while the


Nasdaq Compound

is down 20% and in a bear market.

The major movements are taking place despite the limited direct exposure of American companies to the Russian economy. The outlook for monetary policy has also been fairly stable. Meanwhile, the trajectory of economic growth has declined slightly, but not dramatically. Friday,


Goldman Sachs

economists lowered their forecast for U.S. gross domestic product growth for 2022 to 1.75% from 2%.

“Because they’re caused by exogenous events, the corrections we’ve seen are a bit more emotional and general, rather than specific and fundamental,” says Eric Schoenstein, chief investment officer of Jensen Investment Management, with 14.5 billion dollars of assets. .

History shows that mean reversion is a powerful force. After falling into bearish territory – defined as a 20% drop from a recent high – the Nasdaq has posted a six-month average return of 10% and has been in positive territory nearly two-thirds of the time, rising to the bottom. creation of the index. in 1972. The Dow Jones Industrial Average, meanwhile, posted six-month average gains of 5.2% after falling into a correction (a 10% drop from the peak).

Blind selling gives investors another swing on long-term trends and investing themes.

“It looks like we’re going to have changes in defense spending, cybersecurity and how Europe in particular gets its energy,” says Matthew Moberg, who co-manages growth-focused Franklin DynaTech fund (ticker: FKDNX), with $23 billion in assets. “But that doesn’t change the fact that we’re going to be working from home more, that we’re going to be using e-commerce more, that there’s going to be innovation and growth in genomics.”

This does not mean that the short term will be fluid for investors. Russia is the 11th largest economy in the world, but its second largest producer of raw materials, active in energy, metals and cereals. The United States has banned imports of Russian oil and gas, while European governments have generally avoided directly targeting commodity exports. Western companies are reducing their trade with Russia and their operations in the country. Jeff Currie, global head of commodities research at Goldman Sachs, calls the measures “phantom sanctions.”

“Rerouting raw material supplies will not be easy,” Currie wrote last week. “With or without a blanket ban, the supply of raw materials is likely to remain extremely tight until the conflict is resolved and sanctions are eased, or until flows are effectively redirected to potentially China or the United States. ‘India, which could take months if it happens at all.’

The spike in commodity prices following the war between Ukraine and Russia has pushed back the peak of monthly inflation in the United States by at least a few months. Many economists had predicted that inflation would begin to moderate by this spring or summer.

The S&P GSCI Commodities Index is up 32% in 2022. Thursday’s consumer price index for February posted a 0.8% rise from the previous month, for an annual pace of US inflation of 7.9%.

These readings put additional pressure on the Federal Reserve to raise interest rates more aggressively to control inflation, so much so that it could tip the economy into a recession when it is associated with exorbitant oil prices and potential consumer cutbacks on discretionary spending. expenses.

Currently, futures prices imply interest rate increases of seven quarter points in 2022, according to data from the CME Group. That number first dropped when Russia invaded Ukraine two weeks ago, and has since rebounded. Interest rate swings can do nothing against wartime commodity shortages, but the Fed has yet to maintain its inflation-fighting credibility.

“[The Fed] went through a rather torturous process late last year to move into a position of saying fighting inflation is the No. 1 task,” said Dave Donabedian, chief investment officer of Private Wealth Management. CIBC. “Pulling out of this now would be a significant issue that could even cause a confidence issue in the markets, if the Fed looks like a weather vane.”

The Fed’s policy committee meets on Tuesday and Wednesday.

Edward Yardeni, president of Yardeni Research, now sees a more stagflationary outlook for the rest of 2022. “Everything that’s happened recently points to more persistent and higher inflation and slower economic growth,” he says.

Yardeni lowered its year-end forecast for the S&P 500 to 4,000 last week from 4,800 previously. That’s a 5% drop from current levels.

Overall market trends will likely depend on how long commodity prices remain high. Futures prices are driving oil down to around $88 a barrel by the end of the year, down from a recent high of $107 and a peak of around $130 last week. That’s probably manageable for the US economy, and not enough to turn an expected year of above-average growth into a recession. And that’s unlikely to significantly dampen profits for most companies.

In fact, 2022 earnings estimates for the S&P 500 actually rose last week, despite the war, according to Refinitiv data. Higher inflation could still be felt in the stock market‘s price-to-earnings ratio, currently at around 18.5 times for the S&P 500. That’s down from 21.5 times at the start of the year.

“These kinds of earth-shattering events can create some really good opportunities for long-term investors, because the market is too short-term and paralyzed with fear, and just throws the baby out with the bathwater,” says David Giroux, chief investment officer of T. Rowe Price Investment Management, and manager of the


T. Rowe Price Capital Appreciation

(PRWCX), with nearly $34 billion in assets.

Giroux, member of the annual meeting Barrons Roundtable, sees value in some technology, industrial and healthcare names that have fallen more than the market over the past month but whose fundamental outlook has not changed.

The wide


Healthcare Select Sector SPDR

The exchange-traded fund (XLV) has been roughly flat since mid-February, but many components of the ETF have lost significantly more and even lagged the S&P’s roughly 5% decline. 500 during this period.

People will still need healthcare, however, and there should be little to no impact on a US-focused medical device maker’s business due to soaring raw material prices or even a global slowdown.

These unfairly tarnished stocks include


Baxter International

(BAX), which makes treatments for kidney disease as well as medical tools and devices;


Mettler-Toledo International

(MTD), which manufactures a wide range of medical and laboratory devices and instruments; and


Abbott Laboratories

(ABT), made famous in recent times for its rapid Covid-19 tests but also widely diversified.

Another buying opportunity amid recent volatility could be US banks. the


SPDR S&P Bank

ETF (KBE) has lost around 9% since mid-February and has now been in negative territory for a year.


Citigroup

(C) is the most Russian-exposed of the major US banks. It has loans, cash and other commitments totaling nearly $10 billion, the bank said, as well as a consumer banking presence in Russia.

Despite the war in Ukraine, interest rates in the United States continue to rise this year, which will stimulate bank lending activity. Shares of


Bank of America

(BAC) and


Wells Fargo

(WFC) are both 15% cheaper than a month ago; neither cited material exposure to Russia.

However, investors shouldn’t be tempted to chase this year’s biggest winners. Energy stocks in the S&P 500 are up nearly 40% in 2022. Some of the biggest gains come from upstream producer stocks, such as


western oil

(OXY), up 100% – which benefit from higher prices today, says Kimball Brooker, who co-leads the $49 billion


world’s first eagle

funds (SGENX).

Other companies more tied to oil and gas production levels, such as


Schlumberger

(SLB) or drilling equipment manufacturer


NOV

(NOV) – have not climbed as much. They could benefit, Brooker notes, if oil prices stay high for at least the medium term, which is needed for more expensive production methods like offshore drilling to kick back in.

There is no escaping the fear and tragedy that fills the daily headlines. But they shouldn’t change long-term trends. In this sense, volatility offers opportunities.

Write to Nicholas Jasinski at [email protected]

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