from right now to… ?

After peaking almost exactly a year ago at 4800+, the S&P 500 fell, in the jagged way stocks usually do, to 3500- in the middle of October, before rebounding to the current 3900+.

Where to from here?

Morgan Stanley Chief Investment Officer, Mike Wilson, someone I don’t know, but who has been the most right about the current bear market among strategists who make their predictions public, has been very upfront about his view that the market has one more downdraft left in it. That, he thinks, will come in 1Q23, as companies will stop hoping against hope and announce a final downward revision of their near-term earnings prospects, acknowledging at last a grimmer economic reality than they have so far been willing to admit. This action, he thinks, will drive stocks down to new S&P lows of 3000-3300, establishing a floor from which the market will recover as earnings improve.

There are considerable reasons, that I might classify as market symmetry, for thinking this may happen. This would return, full circle, the market to its position just before the pandemic broke out. It would extend the bear market to at least average length of 12 – 18 months. The market would have lost about 1/3 of its value from the peak (technical analysts love thirds and quarters). And the final dip would more or less coincide with peak inflation and the end of aggressive Fed interest rate hikes.

I also think its correct that publicly traded companies probably still have ugly secrets–like inventories accumulated in too-high quantities and at too-high prices as they struggled with pandemic-induced supply chain shortages. Target (TGT, a stock I own, and which I think is a well-managed company), for example, announced at mid-year that it had lots and lots too many TVs and home appliances, because it had been betting pandemic-induced spending would last longer than it has. After the September quarter it confessed that light-fingered “guests” had made off with the better part of a half billion dollars more than expected of unpaid-for goods. Can we rule out a big inventory writedown after the holiday selling season? NO! Maybe a reason to buy, though.

It’s also right, in my experience, that while in bull markets investors buy expectations of future earnings glory, in bear markets we focus very sharply on the ugly present–and discount it (by selling) in masochistic fashion, over and over again. In addition, I think the focus of trading bots is still mostly (entirely?) on speedy reaction to public announcements, not on forming expectations about future corporate statements, trading those in advance, and then also trading on the difference between those expectation and announcements, once made. In other words: bots are still pretty dumb–although I think this is slowly changing; and even though we might expect 4Q22 results will be ugly, bots will beat stocks up as if no one suspected.

Having written all this, it’s still true that trying to time the bumps in the market road (admittedly, this could be an epic pothole) is probably the least important thing for us as investors to do.

For us, it’s much more important to work out which sectors of the market we want to emphasize and which we want to avoid.

Are there concepts or themes we want to play? For example, I think we’ve barely begun to work out the implications of Washington’s decision to deny the most advanced semiconductor technology to China. I also think the electric car industry, ex TSLA, is interesting, which implies, looking at bombed-out, stomach-churning legacy automakers that have brand names. I suspect that the market isn’t completely finished with the opposition between stay-at-home stocks and back-to-work–meaning selling the former and buying the latter.

As I’ve been writing for a while, I find myself suddenly interested in value stocks–ones where the asset value, including intangibles, far exceeds the stock price. At some point, stay-at-homes will be in this category, but not right now.

Back to a possible 1Q swoon. Maybe it will happen, maybe not. If it does, though, that would be a good chance to upgrade our portfolios–sort of like an end-of-season sale. It’s worth giving some thought to what we might buy–stocks we’d like to own but which seem to richly priced right now.

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