October 28, 2022
There is a lot of bad news. In fact, some of it is really bad. Good news though, it doesn’t seem to be all that upsetting anymore.
Markets tend to lead what is happening in the underlying economy, and over the past 10 months, worries about the myriad risks to the world have been pummeling markets. At the same time, markets tend to display seasonality. October is often considered to be the worst month for markets, because companies begin to re-evaluate how their entire year will end and provide a window into expectations for the coming year.
This week is the biggest week for earnings, with major components of the largest indices reporting earnings, and the news has been pretty bad. Apple, Microsoft, Amazon, Google and Meta (Facebook) have reported earnings that were somewhere between ‘meh’ and horrible. The market shrugged.
Meta (Facebook) and Amazon have suffered severe reactions, losing about 20% each after releasing their results, but overall, the market has shrugged off the disappointment. When the bad news has been released and the market doesn’t overreact to the downside, it is a sign that the bad news has been priced in.
Of course there are still major risks to consider before jumping in with both feet, but investors are sending a signal that much of the bad news may be priced into the market already. It is time to dip toes back in the water.
Buying high quality companies with low debt levels is critical. There is still plenty of difficulty ahead in the economy and those difficulties will impact companies differently everywhere. Diversification is also important and distributing country risk is also a wise approach.
For example, the difficulties in Europe are currently very serious, but the equities in the region are perhaps more reasonably priced because of it. In a similar vein, the risks of investing in Asia (particularly China) may be significant, however the region is also undergoing significant strain but if the problems are resolved without significant conflict, the economic gains from the region could be substantial.
Another way to provide some protection is to put a higher weighting on companies that supply necessities, (food, fuel, electricity) and shy away from companies focused on discretionary spending, such as restaurants, travel and entertainment and perhaps fashion. These are just general guidelines. Recall that economics have been significantly disjointed by excessive inflows of money and exceptionally low interest rates and plenty of good companies may face unexpected difficulties, while many seemingly bad companies may do well due to luck, innovation, buyouts or other positive factors that aren’t easy to see.
Stock market ‘bottoms’ are very difficult to pinpoint and often they form over weeks or months, and so another important component is to invest over a ‘long’ period. In these difficult times, that advice is ever more important. Still, it looks like the stock market is forming at least a near term bottom.
Practical Advice 