As the Fed’s interest rate decision approaches, the S&P 500 / SPX (SP500) and stocks in general are in another volatile phase. However, it’s not just the FOMC meeting. The Russian invasion of Ukraine, soaring energy prices, persistent high inflation and now a possible Russian default all contribute to the recent spate of sell-offs on Wall Street.
SPX 1 year
The SPX has been on a downward trend since the beginning of the year and has given up around 15% from its ATH, making this a great correction to kick off the new year. Additionally, the SPX is approaching a critical support level at 4,100. If this crucial support level breaks out, the main average could slide into the 4,000-3,800 range later, leading to a full blown 20% correction. However, the fundamental concerns here may be exaggerated and the SPX is likely near a medium-term low right now. I have recently added several heavily beaten titles and am looking to buy more as the SPX is expected to stabilize, recover and proceed higher after the FOMC event.
The Fed: not so hawkish anymore
There was a strong likelihood of a 50 basis point rate hike about a month ago, but that’s no longer the case. With the Russia / Ukraine conflict, correction continues, questionable economic readings and other elements, the Fed is likely to take a less aggressive approach as we move forward.
We see that while there was a roughly 60% chance for a 50 basis point rate hike at the March meeting a month ago, the odds have dropped to less than 2% now. With stocks declining in recent months and current geopolitical issues, the Fed is likely to take a more accommodative approach to normalizing rates. We have seen a sharp decline in aggressive rate hike expectations in recent weeks, and given the current economic environment, this trend is likely to persist for some time. I have been warning of caution for weeks about the new phase of the 2022 correction, but we could finally see the end of this selloff if the Fed gives the market what it wants, a more accommodative monetary approach.
The report on work
The most recent report on non-farm jobs / payslips was exciting. On the one hand, we have seen very robust employment growth, especially in the private sector. This dynamic shows that the economy remains buoyant and is still expanding at a healthy pace. On the other hand, we have seen the average hourly wage increase less than expected. The smaller-than-expected jump in hourly earnings implies that inflation may not be as hot as other inflation indicators illustrate and the Fed may take a more dovish approach on its path to “normalize” interest rates. Additionally, the PPI and additional inflation and economic readings were cooler than expected, further adding to the idea that the Fed should take a less aggressive approach to tightening monetary conditions.
Don’t fear the Russian default
There is now talk of a Russian default, but these fears may be exaggerated. Yes, the Russian economy is collapsing, but the country has a remarkably low debt-to-GDP ratio. Russia’s national debt is only around 18% of GDP (2020) and the country’s debt payments of around $ 700 million in March are not very significant. Therefore, Russia may not default on its debt as its debt payments are relatively small. Furthermore, Russia could conceivably receive economic help from the Chinese Communist Party (“CCP”) and, even if the country defaults on some of its debt, it will likely have limited contagion effect globally. According to the chief executive of the IMF, global banks have an exposure of approximately $ 120 billion to Russia, which is not of systemic importance. I am more concerned about Russian companies defaulting on their debt in the future, but this too should have relatively little contagion effect, especially in the US
Best house in a bad neighborhood
While there are obvious problems with the US economy and the US stock market, it’s still arguably the best home in a bad neighborhood. The world is a troubled place right now. We see high inflation, military conflicts and many other problems. Europe is riskier than usual due to Russia’s fury in Ukraine and the risk of a wider war on the continent. Russia also has a more significant impact in Europe due to the Union’s dependence on Russian energy resources. The United States has no such problems and is well insulated from vast oceans and an extraordinarily resilient economy. Therefore, the money should continue to flow into the US and continue to be in the US stock market. Right now, the forward P / E ratio on the S&P 500 is only around 18.85, which is not high given the current economic and monetary dynamics. Therefore, if the growth story in the US remains intact and the Fed takes its foot off the hawkish gas sale, we can likely see a substantial increase in multiple expansion as we move forward into the second quarter and second half of the year.
My recent additions
We are starting to see constructive price action in some of my favorite titles. In addition, many quality growth stocks have been trampled in recent weeks and now represent attractive buying opportunities.
Advanced microdevices (AMD)
AMD is one of the best companies out there, in my opinion. AMD continually exceeds consensus analysts’ estimates, expands rapidly, and becomes increasingly profitable. AMD is trading at around 25 EPS estimates forward and the company could very well exceed the estimated results. AMD’s technical picture is improving, as the stock has held the $ 100 support level multiple times. AMD has a substantial chance of climbing significantly higher in 2022, which is why I recently doubled my AMD position.
SoFi was flying high in November, but the stock has been hammered in the past few months. We’ve seen a nearly 70% drop from its ATH and it looks like the selling may be overdone in SoFi. The company has significant growth potential of more than 50% year-on-year revenue growth expected next year. However, the stock is now only trading at around three times its sales. This valuation is remarkably affordable for a rapidly expanding company with a substantial growth track ahead. I recently went ahead and doubled my SoFi position below $ 10, and I expect this stock to rise significantly over the next 1-2 years and longer term.
Palantir is another growing name that has had a very tough ride for several months. Its stock price has also dropped about 70% from its 52-week high. However, in my view, around $ 10 Palantir is a very attractive buying opportunity. The company has significant growth prospects and also has the potential to become significantly profitable over time. Palantir is criticized for its SBC and its reliance on government contracts. However, the company’s stock is expected to rise significantly as Palantir’s problems are alleviated in the years to come. Palantir is one of the most promising growth companies in the United States, not a Chinese scam company.
I have mentioned several companies, but right now I am long on a few names in the All-Weather (“AWP) portfolio. The diversified holdings of the AWP are up about 7% year to date, which is substantially more than the 10% loss. in the S&P 500 and the 17% decline in the Nasdaq Composite. A medium-term low could be near and we could see a significant rally after the FOMC decision. It appears that fundamentals and an improvement in the technical framework could push equities and other asset risks significantly higher than current oversold levels. In addition to our 62% allocation to equities, 26% allocation to gold, silver and miners, I also recently took the AWP cryptocurrency basket up to 10% of holdings I suspect that assets risk can rally considerably from here, provided the Fed takes a more accommodative stance on monetary policy.