After a turbulent start to 2022, it's time to evaluate where we are. Is the stock market overvalued or undervalued? Should we buy to dip?
The market spent this year recovering from the Russian invasion of Ukraine. Then, Federal Reserve chair Jerome Powell suggested that the Fed could be more aggressive in lifting interest rates. Shortly after, the Dow Jones, Nasdaq, and S&P 500 dropped up to 25%.Then in the US we had the mini Budget and diving Pound and spiking inflation and the biggest single interest rate rises in over a decade.
The Fed's tightening of monetary policy was thought to have been built into market prices. With more hikes and large ones promised next year, the markets are understandably edgy.
This move indicates it's very serious about tackling inflation, even if that means stifling economic growth.
On the positive side, a lot of the information affecting stock prices is out in the open. The market understands that The Fed intends to end its accommodative monetary policy. Geopolitical risks, high valuations, inflation, and slow global growth are well documented. Additionally, corporations are well stocked with cash and should be able to survive a downturn.
On the other hand, inflation and slow economic growth will affect profitability. Supply chain problems — already an issue since the pandemic — have been aggravated by the Russian invasion of Ukraine.
However, historical trends suggest that market pessimism like this is traditionally followed by positive returns on a 6 to 12-month basis.
Which Sectors Still Hold Value?
Depending on which metrics you look at, the Energy sector could still hold a lot of promise. It's up around 32% this year, but its P/E ratio is only around 11. Compared to the Tech (P/E 23.83) and Communications Sector (P/E 18.27), Energy looks undervalued. I don’t hold stocks for more than 12 months at a time anyway.
I am in US energy stocks and a lot of cash on the sidelines. For the UK only one in four FTSE 100 companies is up this year and Pearson is the best performer! The FTSE is near its 2000 levels. In the near term, I am willing to wait before looking at UK stocks over US ones.