'Be very, very careful': Strategists urge caution on buying the market dip

Published Tue, Jan 25 20229:45 AM EST

As global markets take turns to sell off amid a period of wild volatility, strategists have recommended investors exercise caution when looking for cheap stocks. The pan-European Stoxx 600 fell 3.6% on Monday after a 1.9% slide on Friday, while U.S. markets initially plunged before swinging back to modest gains by the end of a whirlwind trading session. The volatility continued on Tuesday, with shares in Asia-Pacific roiled by the volatility on Wall Street and U.S. futures falling again . Investors are trying to assess the outlook for monetary policy, with the U.S. Federal Reserve's two-day meeting getting underway on Tuesday and inflation running rampant, along with the Covid-19 pandemic and unfolding geopolitical tensions between Russia and the West over Ukraine . Michael Yoshikami, chief executive and founder of Destination Wealth Management, said the stock market was at an inflection point, and urged investors to be wary during this period of uncertainty. "After our very strong run-up in the fourth quarter of last year, a lot of the issues the market just can't make sense of, and when the market can't make sense of these issues, it tends to sell off and be volatile, and that's what we saw yesterday," he told CNBC on Tuesday. "I would be very, very careful about buying on the dip," he added. Yoshikami suggested that it might be time for investors to begin exploring what "carcasses" are out there to be bought at a discount, but said the overall market is "pretty fairly priced." "That's why we tend to focus more on dividend-oriented assets in this kind of environment, because growth I just don't think is going to get rewarded right now with this rise in interest rates that we're likely to see in the United States," he said. "If you have a stock that's gone up 75% and then it goes down 20%, does that necessarily make it cheap? I think the answer is no. You have to look at what the real valuation is going to look like." In particular, he noted that pandemic-related stocks and those which have benefited from the "re-opening trade" might not offer value for investors just because they have seen a pullback from unprecedented highs. He also emphasized that the average time taken for markets to recover from a full-scale downturn is only around four to five months. "If investors don't panic, they focus on value, they focus on quality, they can still look past the carnage we see right now and still have some sense of optimism," Yoshikami said. Too early to buy the dip In a research note Tuesday, Barclays ' U.S. strategists argued that while the worst of the sell-off so far has been localized to high-valuation stocks, the downside risks arising from monetary tightening are higher at present than in historical comparisons. They suggested that "signs of a broader risk-off are brewing." While historically the start of the Fed's interest rate hiking cycle has not derailed equity rallies, with earnings underpinning positive returns even as valuations declined, Barclays Head of U.S. Equity Strategy Maneesh Deshpande said this time could be different. This is because current stock valuations are still elevated relative to pre-pandemic levels, while the extraordinary post-Covid earnings growth has been driven by a "fiscal stimulus-fueled goods consumption binge" and could face headwinds if this returns to a pre-pandemic trend. He also suggested that the Fed faces a tricky balancing act between trying to curb inflation and avoid stifling growth, with omicron continuing to threaten activity, "especially as China continues to follow a zero-tolerance policy amidst a self-induced credit slowdown." Deshpande also noted that "incipient signs of a broader contagion" emerged last week, as stocks continued to sell off, bonds and the U.S. dollar rallied, the driving force behind returns moved from value to volatility, and the VIX futures curve finally went into "backwardation" — the point at which the current price of an asset exceeds prices trading on the futures market. Barclays estimates that there is still around 8% downside in the S & P 500, with pain concentrated in higher valuation stocks. "Another floor is provided by the Fed put which will likely only be activated after a ~20% broader risk selloff based on the 2001 and 2018 experience," Deshpande added.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, January 24, 2022.

Brendan McDermid | Reuters

As global markets take turns to sell off amid a period of wild volatility, strategists have recommended investors exercise caution when looking for cheap stocks.