Why? Volatility is normal. And market corrections, defined as a 10% pullback from a recent high, are healthy and common occurrences during any bull market.
But a correction doesn’t necessarily mean that an even worse pullback is coming. Few analysts are predicting a long, painful bear market ahead. That’s when stocks drop more than 20% from recent highs.
“Corrections are a temporary setback for a long-term investment strategy, and about half of all corrections since 1966 have resolved themselves in less than five months,” said James Solloway, chief market strategist at SEI’s Investment Management Unit, in a report last month.
Solloway added that higher volatility does not mean there is a “high likelihood that we’re heading toward a bear market or a recession in the near future.”
“Ups and downs are a normal part of the investment cycle,” he noted.
Even a portfolio manager who runs a fund that is hedged against big stock market swings isn’t expecting a major drop anytime soon.
Central banks have unnerved investors by signaling in recent weeks that they may hike interest rates more aggressively than expected in order to rein in rising inflation. But Cupkovic said that he expects inflation to cool off as the year progresses.
There should be “easy money for the next few years,” he said.
Cupkovic also dismissed the argument that a bear market is overdue. That’s because there was one two years ago, when stocks plummeted in March 2020 as the Covid-19 pandemic slammed the US economy. Before that, stocks had been soaring.
“It had been such a smooth ride for investors. Stocks went straight up. There was more complacency,” he said. That’s not the case now. The VIX is more than 60% above where it was trading at the end of 2019.
Oil stocks are the new FAANGs?
Along those lines, Exxon analysts have raised their earnings forecasts for 2022 by 16% over the past three months and have raised their 2023 profit targets by 20%.
“We’re seeing this sector rotation into energy,” said Tony Minopoli, chief Investment officer at Knights of Columbus Asset Advisors. “Stocks will follow earnings.”