The stock market of the United States is back up after experiencing a fairly deep contraction recently. However, investors are wary of buying cheap stocks this time.
In contrast to the decline in stocks that occurred at the beginning of the pandemic, for investors, this momentum is an opportunity to get cheap stocks and will pay off when the market moves up again.
The decline in the stock market this time was judged differently by a number of investors. The risk is greater if investors place bets because the market is also faced with the Russia-Ukraine geopolitical conflict and the more hawkish attitude of the Fed.
The S&P 500 index jumped more than 6% from its lows on Thursday and closed higher last week after investors followed sharp declines following Russia's invasion of Ukraine.
Investors are preparing for more rotation in asset prices after the West announced a series of tough sanctions against Russia over its invasion of Ukraine, including blocking several banks from the SWIFT payment system.
On the surface, last week's rebound resembled the previous bounce the index experienced more than 200% in moves over the past decade. With such an increase, buying when the price drops has become a winning strategy.
However, keep in mind that bargain-hunting investors over the past two years have still benefited from loose monetary policy from the Fed. Meanwhile, they are currently facing geopolitical uncertainty and the Fed's plan to stop its loose policy to fight inflation.
"Investors are trained to buy when they're down because they've got support from the Fed. But now the case is different, there's been one of the most significant geopolitical events of the past decade and Fed support isn't on your side either," said Burns McKinney, senior portfolio manager. NFJ Investment Group was quoted by Reuters on Monday (28/2).
Many expect geopolitical tensions to continue to plague markets as the implications of the war in Ukraine become clearer.
Kyle Bass, chief investment officer at Hedge Fund Hayman Capital Management, believes investors are still not pricing in all the possible outcomes of Russia's invasion of Ukraine, including a prolonged conflict that weighs on global growth and sends higher inflation pushing up commodity prices.
"It's going to get worse before it gets better. Asset managers don't have this result in their area of possibility," he said.
Measures to cut some Russian banks from SWIFT and limit placements on Russia's central bank's international reserves could trigger more market swings, including a renewed rush for safe-haven assets such as gold and treasuries, investors said.
“We saw the recent rally in equities and risk assets rally on the basis that the West is not going to impose very heavy sanctions, but that is bound to change. The fact that it looks like this is going to be a more protracted and drawn-out conflict is not a favorable environment very good for risk assets.” said" said Peter Kinsella, head of global FX strategy at UBP.
Bass said investors should own assets that can maintain value during times of inflation, such as commodities and real estate.
McKinney bought dividend-paying shares he hoped to withstand future volatility in the market and moved some of the money to defense firms.
In addition to the fast-moving situation in Ukraine, next week investors will be eyeing Friday's non-farm payrolls data for February – the last employment report the Fed will see before its monetary policy meeting in March.
Anticipation of Fed tightening has weighed on markets in recent weeks, as investors expect a rate hike of around 165 points in February. Fed Chair Jerome Powell said he expects to raise interest rates in March for the first time since 2018.
Although Ukraine remains volatile, those in favor of buying out of weakness argue that the stock decline from past geopolitical events is short-lived.
LPL Financial's study of 37 major geopolitical events since World War Two found that stocks are up 11% on average one year later, provided a recession does not occur.
Retail investors have been one of the downside buyers, buying a net $1.5 billion on Thursday, data from Vanda Research showed.
BlackRock last week added to its strategic lead in equities, saying investors may be exaggerating how hawkish central banks need to be in their battle against inflation.
JPMorgan analysts, meanwhile, argued that "early volatility around rate hikes is short-lived and equities are making new 2-4 quarter all-time highs."
