When will it be “safe” to buy US stocks? As you may know the Fed is set to accelerate its rate hiking scenario, stopped buying US treasuries and mortgage-backed bonds (called QE or quantitative easing) and should start QT i.e. selling bonds and taking cash out of the market. At the same time inflation continues to print near 8% on the now familiar drivers of wage growth, commodity prices, logistic bottlenecks, housing/rent demand etc. Thus, the Fed will most likely increase rates faster and higher, perhaps to 4% or 5% to tame demand /inflation from the 3% predicted a few months ago. Note that this still implies a market view that inflation will decline, otherwise rates could go higher.
Where does that leave the US stock market? The SP500 and NASDAQ are still trading at near peak valuations of 20x and 30x YE22 PE. Since 2012 when the 10yr Treasury hovered around 3% the market PE’s where 15x and 20x so even on still good earnings we may see significant valuation compression. That’s the bad news.
The good news is that the SP500 has large pockets of cheaper stocks. The bottom 475 stocks that make up 58% of the index are around 10.5x PE vs the top 25 stocks at 32x PE. The NASDAQ also has large pockets of cheaper stocks, the bottom 75 (28% of the index) is around 19x PE vs the top 25 at 34x PE.
In case you are not aware, the SP500, Nasdaq composite (3000 stocks) and Nasdaq 100 have significant exposure to the mega caps (Apple, Tesla, Google, Amazon, Microsoft, Nvidia and FB).
So, while the Indexes may continue to suffer as rate fears materialize, there are plenty of stocks that are lower valued, offer inflation protection and can sustain earnings growth. The consumer staples sector, defense /aerospace, health care, infrastructure to name a few. My strategy is focused on long oil, fertilizer, mining, financials, defense, consumer defensive and short bonds and the index.
