For all of 2022 thus far, stocks have been in a bear market that has seen many of the high-flying tech stocks crash back down from their pandemic-related highs of 2020 and 2021.
The market has been brought down by fears of inflation, high-interest rates, a war in Europe, and even supply chain glitches still related to the shutdowns. In addition, though the pandemic is all but over in most places around the world, many cities in China are still facing lockdowns due to Covid outbreaks which are having a detrimental effect on Chinese manufacturing.
As we head into the fourth quarter, there is reason to be optimistic that the worst is over and we could be on the cusp of another bull run. Though some sectors, most notably tech, will continue to face challenges for the foreseeable future, there are opportunities in this market.
Some Headwinds Will Continue
The equity market will continue to face certain headwinds at least through the end of the year. Most notably, inflation is still quite high and has yet to show any real signs of abating. Inflation fears will continue to hamper the tech sector, where profits are expected to grow far out into the future.
While many of the tech companies still are showing signs of growth and profitability, as long as inflation is high, investors will be hesitant to pay up for those future earnings.
The Federal Reserve is still raising interest rates in an attempt to slow down an overheated economy. While rates are higher than they have been, it must be noted that rates are not high by historical standards. Rates are simply rising toward the historical average after years of being kept artificially low in an attempt to keep the economy afloat during the pandemic.
The higher rates will hamper some industries, most notably the home builders, as both businesses and consumers will be hesitant to take on excessive debt.
Finally, the war in Ukraine will also be a drag on certain parts of the stock market, world energy markets will remain volatile and the European consumer will remain cautious.
Has Big Tech Bottomed?
The four Big Tech behemoths, Microsoft, Apple, Amazon, and Google parent Alphabet all reported disappointing third-quarter numbers and light guidance for the fourth quarter.
Google has seen consistently diminishing growth for several quarters in a row. Microsoft reiterated weaker-than-expected growth in their cloud service Azure. Amazon reported very low fourth-quarter guidance and finally, Apple was initially brought down by lower-than-expected iPhone sales and service revenue.
Since reporting, it does seem that the bottom may be in for Big Tech. All four of those names have drastically fallen from their all-time highs and now their P/E ratios may start to look attractive to new investors. Time will tell but the fourth quarter could well be a nice buying opportunity for these stocks.
Sectors Presenting Opportunities
While tech may still be too volatile for many investors, four sectors could be exceptional buys in the fourth quarter. Industrials, Energy, Healthcare, and Financials.
The big banks such as Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley, and Wells Fargo have a very good outlook and could go much higher in the fourth quarter and into 2023.
The higher interest rates will allow banks with retail customers to still pay next to nothing on deposits but collect a nice risk-free return by purchasing treasuries. Banks with trading operations, such as Goldman and Morgan Stanley, will have a nice quarter as well as investors bring in cash from the sidelines. Both of these factors should combine to make for a potentially nice quarter for the financials.
Healthcare stocks will do well also. With limited opportunities elsewhere, stalwarts such as UnitedHealthcare and other insurers will see multiple expansion as investors will be more willing to pay up for their modest but reliable profits.
In addition to the insurers, several drug makers have exciting drugs in their pipelines that could spell enormous profits going forwards. Most notably, Eli Lilly has an Alzheimer’s drug-seeking FDA approval that, along with improving the quality of life for millions of people, many analysts think could be the most profitable drug of all time.
Also on the healthcare front, by now we all know that the Chinese vaccines are not effective. There is always that possibility that the CCP will swallow their pride and order a billion or so doses of Pfizer’s Covid vaccine, but betting on that would be speculation.
The energy sector will also do well in the fourth quarter. High oil prices mean big profits for the oil field services companies such as Halliburton and Schlumberger. There will likely be several big winners in the energy sector during Q4.
Finally, the industries are poised for a great quarter. We saw during earnings season that conglomerates, such as Honeywell, are seeing increased demand and holding their margins better than had been expected.
Tech’s Diamond in the Rough
Tech will for the most part remain challenged. Chip stocks such as Nvidia, AMD, Skyworks Solutions, Marvell, and others that worked so well in 2020 will stay down due to demand issues as well as inflation fears.
Cybersecurity stocks may be the exception to the headwinds faced by the rest of the sector. Demand for cybersecurity is sky-high, as well as margins. There has been an uptick in cyber-attacks coming out of Russia and elsewhere, and several high-profile data losses in the last few years have cybersecurity at the forefront of everyone’s mind.
Finally, we get to the proverbial elephant in the room. Questions remain unanswered about whether we are headed toward or even currently in the midst of a recession. Objectively speaking, a recession as has traditionally been defined is almost a certainty. For years the generally accepted definition of a recession has been two consecutive quarters of negative GDP growth.
That will undoubtedly happen, the murkiness comes from the fact that elected officials, their would-be opponents, and others in the media have been slowly changing the accepted definition of a recession for political purposes.
The definition of a recession has no impact on the equities market, and those evaluating stocks can disregard the political discourse and focus on the facts and the data.
In eleven of the past twelve recessions, the market bottomed out before the recession ended. Based on that history, it is plausible that the bottom of this bear market has in fact already occurred.
Speaking of Politics
Along the lines of political questions, there are important midterm elections coming up very shortly. Historically stocks tend to rally following elections, regardless of the outcome. The market loathes uncertainty and time and time again we have seen short-term rallies following elections when we get some clarity on what direction the government may take.
On the Global Front
Rising interest rates in the United States, as well as global unrest and uncertainty, have incentivized investors around the world to seek refuge in the U.S. Dollar, sending the exchange rate to unprecedented levels. While a strong dollar may be nice for those planning an overseas vacation, it is not always ideal for U.S. corporations doing business overseas.
With the Dollar trading so high against the Euro, Pound, Yen, and others, companies with sales overseas have seen their profits dwindle as they exchange their profits for Dollars back home.
With interest rates likely peaking in early 2023, or perhaps even sooner, this quarter may be a great time to choose stocks with large overseas operations. On their latest quarterly conference call, Apple noted that iPhone sales in Europe were down, and many other companies have said similar things as well.
On the other side of the globe, China’s economy is still facing headwinds due to Covid related lockdowns. Many of their manufacturing centers have been hit especially hard, causing a ripple effect throughout stock markets around the world.
One wildcard in the equities market may be when will China either shift from its Zero Covid policy or acquire an effective vaccine, either from a Western pharmaceutical company or developing it on its own.
As we head into the final quarter of the year, there are reasons to be optimistic even though there are major challenges to overcome. The bottom line is that the worst of the bear market is likely behind us and there will be some tremendous opportunities in certain sectors. The high-flying tech stocks that worked during the past two and a half years are out, and industrial, financial, healthcare, and some energy stocks may be in.
My own tryst with the stock market began a bit late in my life, beginning around the age of 35, and chiefly in the Indian stock market. It was a time when you had one site called sherkhan.com and another one I cannot recollect. Stocks were purchased and sold via brokers and your own CPA. I had very good ones.
In a span of 3 months, I purchased a few cars – 4 of them – with the money I made through stocks and put them out on hire to a travel co. Thereafter, dabbling in stocks was quite erratic and periodic, though I always made a healthy number of profits, never lost. Lucky? Nope. I read the effing fine print. THAT helped, and a sort of gut feeling about the highs and the lows. Came from poker, I guess.
After a few years of sparse online trading, I put it on the back burner. Some attention went to crypto.
Today, I am back with stocks, though I have my own consultant for the same, who gives me a steady and fixed profit of about 5% each month on my investments. In-house trading helps – as in I have one of my own associates invest healthily as well.
The winning streak continues!