The stock market has become more perilous, but there are ways for investors to play it

Published Mon, Feb 14 20221:26 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Perhaps no stock signals the perilous change in market tone more than Meta Platforms, which crashed and burned after its earnings and is still struggling to move off its lows. The parent of Facebook, Meta plunged 26% on Feb. 3, the day after its earnings, dropping to $237.76. Even with that sharp plunge, it continued to fall, and on Monday, it was at about $218, close to the low it set Feb. 8. Liz Ann Sonders, chief investment strategist at Charles Schwab, said the stock's behavior, relative to its peers is a sign of a new discerning stock market mentality, where groups are less likely to move in tandem and investors have to be more astute as well. "You're seeing this breakdown, to some degree, like the implosion in Facebook that didn't pull Microsoft and Apple down with it. They're not behaving monolithically anymore," she said. "FANG is not an asset class. I think it was seen as an asset class. FANG is a group of stocks and there's a more critical eye on the characteristic of each stock. You're seeing it everywhere." Sonders said the "monolithic" trade was true of other market themes, like when investors were all in on stay-at-home plays or reopening trades. She says to look for value and quality in all stocks, not just those that are tagged value names or sectors. Stocks have been pummeled since the start of the year, as bond yields rose and the Federal Reserve indicated it was moving toward interest rate hikes. Now, worries about a possible Russian invasion of Ukraine are also weighing on the market. The Nasdaq is down about 11% since the start of the year, while the S & P 500 is off 7.5%. "When you think about interest rates it isn't a one way ticket by any means to lower stock prices. The psychology is not what it was a year and a half ago... 'Higher interest rates? Fantastic! Buy stocks,'" said Julian Emanuel, Evercore ISI chief equity, derivatives and quantitative strategist. "But that psychology isn't absolutely broken either. It's a very mixed picture." Emanuel warns however, the distinctions between individual stocks become less clear when volatility spikes and the market sells off across the board. Emanuel said the shift in the market toward value, and away from the big cap tech stocks may be upsetting to investors. He recommends focusing on stocks that can manage their margins and have pricing power, in this period of rising inflation and higher interest rates. "It requires an attitude change. Basically, you're undoing 15 years worth of investing lessons," he said. "In the long-term, it's actually more healthy for the stock market because, in theory, it means the participation is going to broaden out and frankly you'd rather see more boats lifting the tide itself rather than heavy lifting all being done by a [small] number of stocks." FANG was a lesson in contrasts this earnings season. Netflix was also slammed after its report but it is off its lows. Amazon is higher since its positive earnings report that helped boost investor confidence in tech. Sonders says the big five stocks are Apple, Microsoft, Alphabet, Amazon and now Tesla since Meta Platform's pounding. "If you continue to see continued downward pressure in any of these big stocks, obviously that puts more downward pressure on the indexes," she said. Last year, the big stocks buffered the S & P 500, while many other names saw much bigger declines. But the behavior in Meta Platforms shows the big tech darlings are no longer as safe and could have larger market impact. "That is distinctly different than the environment we were in last year," she said. Sonders said investors should look broadly for value traits across sectors. She noted that the average drawdown in Nasdaq and Russell 2000 stocks this year is already more than 20%. "There's ways to navigate this for investors. Even if this isn't just a stealth bear market, which it is," she said. The stock market is considered to be in a bear market when the major indices fall more than 20%. "Value factors are outperforming in tech, " she said. The factors she is looking for are reasonable valuations, positive earnings revisions, strong balance sheets, and strong cash flow yield. She said that does not mean the value indexes or exchange traded funds focused on value will outperform, but the traits of value will. "We think the playing field is getting more level in terms of active versus passive. Maybe it hasn't entirely shifted but that dispersions are increasing. You're seeing consistency at the factor level," she said. Passive investors are more likely to be buy and hold investors, and may be index investors, while active investors seek greater returns from trading more frequently. Emanuel has favored financials and energy, and another sector he likes is healthcare, which he expects to outperform in the medium term. The group is immune to geopolitical risk, but has longer term risk from U.S. regulation. Among the names on Evercore's list are Boston Scientific , Agilent Technologies, Repligen, Charles River Laboratories, Cooper Cos , Envista Holdings , Bio-Techne and Johnson and Johnson. "Margin debt levels outstanding are right at all time highs. In an environment where monetary policy is uncertain, interest rates are rising...Put all that together argues for continued uncertainty and volatility in the near term, as people make the transition to broader based participation," said Emanuel.

Traders on the floor at the NYSE, Jan. 13, 2022.

Source: NYSE

Perhaps no stock signals the perilous change in market tone more than Meta Platforms, which crashed and burned after its earnings and is still struggling to move off its lows.

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