Wall St Week Ahead: Some investors wary of ‘buying the dip’ as Ukraine, Fed gyrate stocks

NEW YORK: US stocks are drawing buyers after a recent tumble, but some investors believe buying the dip this time may be a far riskier bet than in the past.

The benchmark S&P 500 index was recently off around 8.5% year-to-date following a swift rebound from this week’s lows, which were hit as worries over the fallout from Russia’s attack on Ukraine spooked markets already on edge from expectations of an increasingly hawkish Federal Reserve.

After weeks of warnings from Western leaders, Russia unleashed a three-pronged invasion of Ukraine from the north, east and south on Thursday, in the biggest attack on a European state since World War Two that threatened to upend the post-Cold War order on the continent.

The United States responded by imposing sanctions on Russia, targeting major banks and members of the elite coupled with new export control measures.

Buying stocks during declines was a rewarding strategy for market participants during the S&P’s more than 200% run over the last decade, and the recent tumble has been the biggest since the index lost nearly a third of its value in the COVID-19 selloff of March 2020 - which itself proved to be a tremendous buying opportunity.

Yet while bargain hunters over the last two years could count on the Fed’s historically loose monetary policy to offer stocks support, today they face a central bank that is expected to pull out the stops in its fight against inflation - starting with a widely anticipated rate increase this month.

“Investors were trained to buy the dip because they had the backing of the Fed. But now you could make a case that this is one of the most significant geopolitical events for the last decade, and you don’t have the Fed in your corner,” said Burns McKinney, a senior portfolio manager at NFJ Investment Group.

Kyle Bass, founder and chief investment officer of hedge fund Hayman Capital Management, believes investors still haven’t factored in all of the possible outcomes that could result in Russia’s invasion of Ukraine, including a prolonged conflict that weighs on global growth and sends inflation higher by pushing up commodity prices.

“This is going to get worse before it gets better,” he told Reuters in a recent interview. “Asset managers don’t have these outcomes in their realm of possibilities.”

Bass said investors should own assets that can hold value during inflationary times, such as commodities and real estate.

McKinney is buying dividend-paying stocks that he expects to withstand future volatility in the market and moving some money into defense companies.

In addition to the fast-moving situation in Ukraine, investors next week will be watching Friday’s non-farm payrolls data for February - the last such employment report the Fed will see before its monetary policy later this month. Fed Chairman Jerome Powell said he expected to raise interest rates in March for the first time since 2018, and markets are pricing a rate hike from the current level of near-zero to 1.79% by next February.

Though Ukraine remains in flux, those in favor of buying on weakness argue that stock declines from past geopolitical events have been short-lived. LPL Financial’s study of 37 major geopolitical events since World War Two found that stocks were up an average of 11% one year later, provided a recession does not occur.

BlackRock earlier this week added to its strategic overweight in equities, saying investors may be overestimating how hawkish central banks will need to be in their battle against inflation. JPMorgan’s analysts, meanwhile, argued that “initial volatility around rate liftoff didn’t last and equities made new all-time highs 2-4 quarters out.”

Valuations on the S&P 500 stand at a forward price to earnings ratio of 19.4, compared to 22.1 at the beginning of the year, bolstering the case for stocks’ attractiveness to some investors.

Others, however, are taking a more dour view, as the markets price in Fed tightening by next February in the face of soaring inflation.

“We’re bearish,” analysts at BofA Global Research wrote in a recent note, saying they believe the “bull era of central bank excess, Wall St inflation,(and) globalization” is ending, to be replaced by a “bear era” of inflation and geopolitical isolationism. They advised investors to sell during market rallies.

Charles Lemonides, portfolio manager of hedge fund ValueWorks LLC has been increasing his bets against some stocks, including semiconductor maker Broadcom Inc and plant-based meat company Beyond Meat Inc, skeptical that markets will be able to sustain a rally in the face of a hawkish Fed.

“The reality is that the market has had a huge run and inevitably you give back some of those gains,” he said.