Strategies for a Wicked Bad Market

As I visit my native Rhode Island this week, I’m getting reintroduced to regional slang. Wicked is an idiom that generally means very. The term originated as a curse word during the Salem Witch Trials.

In financial conversation with me the other day, a pal who lives in Providence described stock market conditions as “wicked bad.” With the S&P 500 and NASDAQ in bear territory and the Dow Jones Industrial Average close behind, that’s a fair statement.

On Wednesday, the main U.S. equity indices extended their slump as follows: the Dow Jones Industrial Average -0.15%; the S&P 500 -0.13%; the tech-heavy NASDAQ -0.15%; and the small-cap Russell 2000 -0.22%. In pre-market futures contracts Thursday, stocks were trading mixed.

A headwind for the market is decelerating corporate earnings per share (EPS) growth. For the second quarter of 2022, the projected year-over-year EPS growth rate for the S&P 500 is 4.3%.

If 4.3% turns out to be the actual EPS growth rate for Q2 2022, it would represent the lowest earnings growth rate posted by the S&P 500 since Q4 2020, at 3.8%.

Read This Story: Rationality Returns to the Stock Market

Regardless, I’ve noticed some green shoots of hope. I’m still optimistic about the stock market’s prospects for recovery this year and many analysts share my view.

Despite soaring inflation, rising interest rates, the Russia-Ukraine quagmire, and recession fears, analysts continue to confer an unusually high number of Buy ratings on stocks in the S&P 500 (see chart).

There are 10,708 ratings on stocks in the S&P 500. Among these ratings right now, 57% are Buy ratings, 38% are Hold, and 5% are Sell. The five-year average percentage of Buy ratings is 53%, the five-year average of Holds is 41%, and the five-year average of Sells is 6%.

Assuming the percentage of Buy ratings does not dip below 56% by the end of June, the month would represent the 15th consecutive month in which the percentage of Buy ratings on S&P 500 stocks finished above 56%.

At the sector level, analysts are most optimistic about information technology (65%), energy (64%), and communication services (61%) sectors. As the above chart shows, these three sectors have the highest percentages of Buy ratings.

What’s behind this optimistic consensus? One factor is that analysts in recent months have boosted EPS estimates for S&P 500 companies in aggregate for the future.

Analysts expect EPS growth of 5.9% for Q3 2022, and 8.9% for Q4 2022. For calendar year 2022, analysts predict EPS growth of 11.6%.

You should accumulate a buy list to wade into over time. Valuations for many sectors look more reasonable to me than in months. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 is 15.8. This P/E ratio is below the five-year average (18.6) and below the 10-year average (16.9).

Wholesale selling during emotional sell-offs is never a smart move. Only if I see the fundamentals of a stock deteriorating does selling in a squall seem sensible.

I’ve mentioned in the past but want to reiterate the value of dollar cost averaging when establishing positions. The idea is that it is impossible to pick the bottom in a stock, so it is best to spread your purchase over several weeks.

For example, if you want to allocate $1,000 to a particular stock, you might choose to spend $250 per week for four weeks of buying shares.

Looking for wicked good buys in this uncertain market? I suggest you consider the advice of my colleague, Jim Pearce.

Jim is the chief investment strategist of our flagship publication, Personal Finance. Since its inception in 1974, PF has helped readers successfully navigate some of the worst financial disasters of modern times, including the dotcom bust, the Great Recession, and the COVID-induced crash.

We’ve launched a premium adjunct service, called PF Pro, which takes Jim’s advice to the next level, for even greater gains.

As Jim Pearce himself says: “If you like the profits you’re getting from Personal Finance now…you’re going to love what I’ve got in store for you next!” Click here for details.

John Persinos is the editorial director of Investing Daily.

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