Friday's Market Minute: Is It About Time To Start Thinking About Where To Buy Stocks?

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Another week of volatility sent investors on a bumpy ride as swift traders take profits in reaction to every incremental negative update with the Ukraine-Russia conflict. At any glimmer of resolution, the perpetual mega-bulls of the past two years continue to put up a fight and pile back into equities. Events in Ukraine are unleashing exceptional commodity price moves, with wheat prices having risen almost 40% in a month and oil prices at 14-year highs. All of this comes at a difficult time for investors and for policymakers. Supply-side bottlenecks and recovering demand from the pandemic downturn had already pushed up inflation to unforeseen levels. The near-term impacts of rising oil and commodity prices will also most likely take their toll on demand. 

The stock market's down for the year, but it’s not a total disaster. What we are seeing is an acceleration of a correction that was already occurring. Liquidity drying up, mostly as a matter of Fed policy, is the natural catalyst for driving stock prices lower. However, markets have reasonably absorbed a major change in expectations about policy. As recently as last summer, investors were expecting no interest rate raises by the Federal Reserve this year. Yet, the market is pricing in close to seven consecutive increases in 2022 alone. One might conclude that the Fed still believes that inflation is transitory in the sense that it will be falling dramatically in the second half of this year. The impact of a 25-basis point Fed rate hike in March, a few more by summer, and more oil from the Strategic Petroleum Reserve could lower inflation dramatically by autumn.

Looking at equities, it is clear that using the previously successful buy-the-dip playbook has not worked so far in the current prolonged market correction that began in November last year. The market has had a lot thrown at it, and the correction could possibly manifest into a cyclical bear market within the context of a mid to late-stage expansionary economic cycle. Consumer sentiment is weak, investor sentiment is bearish, war is ongoing, stagflation is problematic, fiscal stimulus is wearing off, and the Fed is undeterred from hiking rates mid-March. Afterall, what else could go wrong? Using the glass half-full contrarian approach, perhaps it’s time to start thinking about where to buy stocks once the market discounts that things have gotten so bad that they eventually must be good.

Image sourced from Pixabay

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