- US stocks have risen in recent months, giving investors hope that the market has bottomed out.
- But Wall Street strategists have warned against trying to time the market, with further volatility ahead.
- The bear market could drag on until the Federal Reserve stops raising interest rates, they warned.
Bullish investors have come to believe that US stock markets are reversing after a bleak first half of the year.
Optimists like Fundstrat’s Tom Lee have argued that stock prices have bottomed out, saying the summer rally on major US benchmarks is a flashy sign that they will hit their all-time high before the end of 2022.
The S&P 500 is up about 17% and the tech-heavy Nasdaq is up more than 20% in the past two months from early Friday. Traders have found cause for celebration in the Federal Reserve’s pledge to be data dependent on rate hikes and lower-than-expected inflationary pressures in July, which have allayed concerns about a recession.
But Wall Street’s biggest names aren’t taking it. Analysts at major banks have argued that the current recovery in stocks is just a classic bear market rally – when stocks rise sharply, but only for a short time, before resuming a long-term decline.
“Stocks are still not cheap despite the bear market,” Savita Subramanian, an equity and quantitative strategist at the Bank of America, said in a recent research paper.
“In fact, they are more expensive after the S&P 500’s 17% rally from its June low, driven by a decline in the cost of equity.”
Analysts such as Subramanian and Jason Draho of UBS say this is not the time to time the bottom, and disappointing economic data could push stocks lower.
“Becoming more optimistic in today’s highly uncertain environment makes markets more vulnerable to negative news,” said Draho, head of US asset allocations at the Swiss bank.
Wall Street’s base case remains that stocks won’t have a real rebound until the Fed turns around and starts cutting interest rates. The US central bank raised rates by 75 basis points in June and July to try to contain inflation, which has been high for nearly four decades.
Morgan Stanley’s Mike Wilson has warned investors not to bet on a rate hike break in the short term. The bank’s CIO noted that July’s strong labor market report, which showed the US would add 528,000 jobs, would give the Fed room to continue to tighten aggressively.
“While inflation appears to be peaking, it’s not likely to rise fast enough to fuel the kind of sustained Fed pause that the stock market is already discounting,” Wilson said in a recent research paper.
Bank of America said this week it expects rate hikes to continue through February 2023, with nominal interest rates reaching 4%. Meanwhile, Goldman Sachs said a Fed break probably wouldn’t happen until late 2022.
While it’s tempting to dive into stock markets, the consensus on Wall Street is that investors should bide their time, rather than buy haphazardly.
“The message from us for the coming months remains,” Wilson said. “Risk/reward is unattractive and this bear market remains incomplete.”
Read more: Morgan Stanley: Investors shouldn’t be fooled by the bear market rally — but they should buy these 22 undervalued stocks that will beat the S&P 500 in the coming year