The Market Slump: How Bad Will It Get?

I spent last weekend with my twin six-year-old grandsons. Reading to them at bedtime has become one of the great joys in my life. The stock market sell-off last Friday reminded me of a favorite story of theirs: Alexander and the Terrible, Horrible, No Good, Very Bad Day, a classic that came out in 1972 and was later made into a movie.

U.S. stocks last week revisited the lows of this year’s trading range. On Friday, the markets finished the month of April with a steep slump.

The S&P 500 is down 13.3% year-to-date, beyond the official correction threshold of 10%. The tech-heavy NASDAQ is down 21.2% year to date, a bear market. The Dow Jones Industrial Average hovers near a correction, with a year-to-date decline of 9.2% (see table, with data as of market close April 29).

The S&P 500 has marked its worst start of the year since the Great Depression year of 1939. The NASDAQ is off to its worst start in the composite’s history. The combination of rising interest rates and China’s COVID-induced slowdown is crushing the tech sector.

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Whether the market has found a bottom is unclear. Historically, corrections are often steeper that 10%. Regardless, corrections are a reality that investors must accept. They’re also buying opportunities, if you know where to look. Below, I point you in the direction of compelling value.

The Putin Effect…

The big worries now are downward revisions to global economic growth, due to China’s draconian COVID lockdowns and the havoc wreaked by the escalating Russia-Ukraine war.

The war in Eastern Europe is the biggest drag on growth, and for that, blame rests on the shoulders of one person: Russian President Vladimir Putin. The mercurial autocrat is a variable beyond anyone’s control. Putin has even threatened to use nukes, a risk that’s terrible, horrible, no good, and very bad.

U.S., European, and Asian economies are slowing, sending a scare into investors, and taking their attention away from the overall good news about corporate earnings.

We face further volatility ahead, as the overseas war, pandemic, rising interest rates, and inflation dampen economic activity. And yet, I still don’t think stock market declines will get much worse this year. The recent swoons probably don’t presage a crash or recession.

Data last week showed that U.S. real gross domestic product (GDP) fell 1.4%, versus +6.9% growth in the previous quarter. But consumer spending, which accounts for nearly three-fourths of the U.S. economy, continued to grow at a healthy rate. As the pandemic wanes and supply chain shortcomings get sorted out, the expansion should get back on track.

My positive assessment isn’t Pollyannish. Key fundamentals remain solid. Corporate earnings growth for Q1 has been respectable, and managerial guidance for the rest of 2022 has been generally upbeat.

Consumers are sitting on ample savings and they’re still in the mood to spend. Personal consumption in Q1 accelerated to a year-over-year growth rate of 2.7%. For context, consumer spending during the past decade has grown at an average annual rate of 2.3%.

Major economic reports to watch in the week ahead include the ADP employment report, ISM services index, Federal Open Market Committee (FOMC) statement, and Fed Chair Jerome Powell’s news conference (Wednesday); initial jobless claims (Thursday); non-farm payrolls, unemployment rates, average hourly earnings, and the labor force participation rate (Friday).

Any of these data points could serve as catalysts for the market’s direction (up or down) over the near term.

In search of growth…

Value stocks that benefit from economic re-opening make sense now. I especially like global companies that provide consumer staple brand names.

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John Persinos is the editorial director of Investing Daily.

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