A bear market in stocks typically ends during a recession, not after one, according to BMO’s Brian Belski.Belski outlined his bullish view for stocks and outlined how investors should be positioned for an eventual bull market.”It is safe to say that the current tightening cycle is nearing an end, which has historically been a positive for US equity performance,” Belski said. Loading Something is loading.
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The bear market in stocks is nearing its one-year anniversary as investors brace for further interest rate hikes from the Federal Reserve, but according to BMO’s Brian Belski, investors should start to prepare for a bull market return.
Belski outlined his bear market playbook for investors to follow in a recent note, and it highlights some interesting characteristics of the stock market as it attempts to transition from bearish to bullish.
Recessions and the stock market.An official economic recession typically represents a less opportune time to sell equities because the timing isn’t known for months later. In other words, we could be in a recession right now and not even know it, according to the note.
“It is important to note that we will likely not know whether a recession has indeed occurred until several months after the fact given the lag time for the National Bureau of Economic Research to officially determine the business cycle peak and trough,” Belski explained.
And there is precedent for the economy to avoid a recession entirely despite the sharp drop in stock prices, based on historical data.
Of the prior 13 bear markets in the S&P 500, four of them did not coincide with or immediately precede a US recession. Those instances occurred in 1946, 1962, 1966, and 1987.
“Therefore, there is a possibility that the recession that many investors have been calling for has already occurred or does not even occur at all (soft landing),” Belski said.
Fed interest rate hikes and the stock market.Fed tightening cycles do not always represent a road block for stocks to perform well, as prior interest rate hike cycles have ended well before the stock market peaked.
For example, the Fed’s most recent interest rate hiking cycle ended in December 2018, which was 426 days before the S&P 500 peaked in February 2020.
“While the specific timing of the final rate hike by the Fed may be up for debate, it is safe to say that the current tightening cycle is nearing an end, which has historically been a positive for US equity performance,” Belski said. “On average, the S&P 500 posted gains of 16.4% in the 12-month period following the conclusion of tightening cycles.”
After a decade of near-zero interest rates, investors are growing concerned that higher interest rates fo longer will equate to poor stock performance as investors start to favor bonds over equities. But Belski highlighted that the stock market has performed just fine during prior periods of high interest rates, and that interest rates aren’t really that high right now, relatively speaking.
Since 1979, the average 10-year US Treasury yield is 5.8%, while the pre-financial crisis average is 7.6%. That’s much higher than the current 10-year US Treasury yield of 3.96%. Stock market investors, therefore, do not need to be afraid of higher interest rates.
New leadership vs. old leadership.As the stock market prepares to enter anew bull market, investors shouldn’t return to the playbook that worked over the past decade: buying tech stocks.
That’s because market leadership during a prior bull market rarely returns as a leader during the new bull market.
For example, while technology stocks surged during the 1990’s dot-com boom, they underperformed most other sectors during the 2003 to 2007 bull market.
“In the most recent cycle, Tech and Discretionary topped returns during the three-year period leading up to the 1/3/22 peak. If this trend of changing leadership out of bear markets continues, these aforementioned sectors are unlikely to be the standout performers during this current cycle. In fact, we may already be seeing some early signs of this as Industrials, Materials, and Financials have been the sector leaders since the 10/12/22 low,” Belski said.
Belski recommends investors add exposure to healthcare, financials, and communication stocks and reiterated his year-end S&P 500 target at 4,300, which represents potential upside of 9% from current levels.