US stock markets have of late faced severe turbulence after a stellar run over the past few years. Amid heightened volatility and uncertainty, which US stocks must one buy to build a long term wealth creation portfolio? Are high growth stocks, such as Apple, Microsoft, Google, Amazon, Tesla, Netflix, etc, still as attractive as in the last decade? Or, has the US Federal Reserve prompted a decisive move of capital towards value-oriented stocks for the long term? Steve Sosnick, Chief Strategist, Interactive Brokers, spoke to Shaleen Agrawal of FinancialExpress.com. He shared his outlook for the US stock market; for value stocks vis-a-vis growth stocks; and ideas on where to invest for the next decade. Here are edited excerpts from the interview.
What is your outlook for US stock markets in the near-term? How should investors navigate the current market volatility?
I had expected that the US stock market would see high volatility in 2022. That is still not behind us; we are still in choppy waters. Now, the risk-reward factor has changed. Of late, investors have become complacent. Risks were low, thanks to the US Fed, and central banks around the world. That calculus is now going to change. People got in love with growth stocks. Now, they are realising that maybe any price is not the right price for growth stocks if those companies are not growing. It’s time to take some risk off of the portfolio; investors might want to look at adding some dividend-paying securities.
What is your outlook for S&P 500 stocks vis-a-vis Nasdaq Composite stocks for next 10 years?
Both major indices S&P 500 and Nasdaq are very intertwined, with the top few stocks that account for the bulk of the market capitalisation being common across both the indices. The relative performances of S&P 500 and Nasdaq may not be dramatically different, mathematically. Leading tech stocks of Nasdaq have become heavyweights on S&P 500 too, because those have delivered that kind of performance. For the long term, investors must build up their portfolios slowly. SPX (S&P 500) could be a better option than the NDX (Nasdaq 100). This is because S&P 500 is a broader index with a cross section of industries; it is globally diversified too. Investing in SPX helps to build a broader portfolio.
Why did US stock markets come under severe pressure following US Fed comments on inflation and fears of monetary tightening?
For growth stocks, growth is needed; the bar needed is tougher for such stocks. The US Fed fiscal stimulus supporting growth stocks so far can’t be ignored. One needs to see has the US Fed message got everyone nervous enough already to price in any follow up action. In recent months, the market fell after each Fed meeting.
Could the US stock markets fall further when the US Fed moves to real action beyond just the talk? Or, is the worst already priced in?
I think that part of the US Fed’s job between meetings is to test their messaging to see what scares the market. If they get markets nervous about how much they might tighten, markets will react well if they don’t do as much as feared. I don’t think that the Fed Governors have finished testing how much they can talk about raising rates or tapering bond purchases before the next meeting. Regarding the market’s performance after FOMC meetings, on average, market moves have been lower even during the midst of a raging bull market. Markets got too excited about the Fed’s messaging, then disappointed when the actions were only as expected. However, since they moved to a tightening stance, we have seen a change in pattern. The S&P 500 has tended to rally in the post-meeting period because of the opposite effect. Traders got too nervous about the Fed’s message, then were relieved when it wasn’t as bad as feared. Prior to September 2021, ten of 12 FOMC post-meeting periods were lower in an upward market with an accommodative Fed. Since then, three of four have been higher even as the Fed is no longer using accommodative rhetoric.
With the markets falling and being volatile, should investors keep buying the dip? If yes, then how far, and how frequently?
The money has kept coming into the US equity markets. But, so far, all the dips were muted. Now, investors mustn’t assume that every small dip is a buying opportunity. When the market trend is not friendly, investors must be more selective, and buy scrips that are undervalued.
What is your near-term outlook for the INR-USD pair?
The Indian Rupee should do well versus the USD.
In that case, why should Indian investors move capital abroad to invest in the US markets if there’s no currency advantage to be had?
Diversification of the portfolio alone is a very big advantage. Investing abroad offers investors a whole world of investments that should negate the drag of currency.
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