How Do We Play This Sell-Off?

FYI | Oct 24 2018

By Peter Switzer, Switzer Super Report

The month of October is famous for scary market crashes, such as the biggie of 1929 and then there was the 1987 crash that brought a lot of entrepreneurs undone — Alan Bond, Christopher Skase and Robert Holmes a Court to name a few. And the current one hasn’t been great for our share market, with the AFR telling us that it’s the cheapest since 2015!

J.P.Morgan maths says “the benchmark ASX 200 index is trading on a 12-month forward price-to-earnings ratio of 14.7 after starting the month at 16.” And I can’t help but think that this is a prelude to another great buying opportunity.

Cautious optimism

That said, I can’t say right now: “Ready, steady, aim…buy!” And that’s because I think there are some market-rattling issues that need to get sorted before you buy with confidence. Buying now should be with apprehension but sometime next month, I reckon, will be good to go for re-stocking.

And I’m not alone with this controlled upbeat view. In the US, “Goldman Sachs strategists think the worst of it already may have passed.”

CNBC looked at the investment bank’s crystal ball analysis.

“We see limited further downside,” David Kostin, Goldman’s chief U.S. equity strategist, revealed in a note. “Despite the recent sell off, equity fundamentals are strong and we remain constructive on the path of the S&P 500.”

He’s got an S&P 500 target for year’s end of 2850, which is not too far off the current level of 2767, but that at least says the smarties at Goldman aren’t bracing for fear and loathing on Wall Street.

The big challenges for stocks right now are: rising interest rates; the China trade war; the upcoming midterm elections in the US on November 6; oil prices heading higher with Iran and Saudi Arabia causing problems; and Italy giving the EU headaches over their budget deficit. You could also throw in Brexit and the impact of rising rates and a stronger greenback on emerging economies.

Matter of timing

With all these curve balls being thrown at stock markets and, as I said on Saturday, many being thrown by screwballs, you are punting if you go long stocks now. That said, I think the economic data coming out of the US and EU, which is locally supported by improving corporate bottom lines, tells you that you should be ready to be long stocks and it’s now just a matter of timing.

Supporting Goldman’s optimism is the CNBC All-American Survey, which showed that 51% thought it was a good time to invest — a record high!

This survey has a pretty good track record in recent times.

Back home and this slide on the market’s P/E is partly a reflection of the fast growers, such as Afterpay and Wisetech, which have been on a rollercoaster ride lately.

It’s no surprise that the most expensive stocks – the ones that exploded through August reporting season – have suffered the biggest reversal in October, copping a P/E contraction of 7.2 points.

The chart below shows how some of the darling stocks have really copped it in October.

This chart shows what has really happened to the overall market, as shown by the ASX 200 index, over this so-called scary month. It’s more around a 3% slide and remember, some of these tech stocks would have partly created that negativity.

Over that time, CBA slipped from around $70 to now be closer to $67, while CSL has gone from $201 to $186. The darlings and growth stocks have copped it, and now more experts say it’s time for value stocks.

Waiting on the US midterms

The fact that most sectors have copped it in October makes me more geared up to want to be a buyer when the midterm election is over and when Trump and China kiss and make up. We don’t know when that will happen, but when it does I expect a big bounce back for the local market compared to Wall Street.

Provided Wall Street is positive, then we will get direction from the NYSE, however we should rise faster because China should be tearing higher. Of course, I’m gambling that Trump will come up with one of his famous deals. That said, if he doesn’t, I reckon we’re near the bottom of what the tariff battle has created for stocks.

The courageous me would buy now but the chicken me says wait until after the midterm elections are over.

“The J.P. Morgan strategists remain upbeat on the ASX overall, saying it’s cheap versus its three-year average and are sticking with their 6500-point target, which is around 10% higher from here,” the AFR reported over the weekend.

Meanwhile, Goldman is not only positive, but is backing growth stocks!

“In the face of those headwinds, Goldman is advising clients to shift to growth stocks with an emphasis on strong balance sheets,” CNBC noted. “Those with lower debt levels will have a better ability to withstand rising interest rates.

“Goldman’s basket of growth stocks with the highest return on equity has modestly outperformed the S&P 500 this year, gaining 4.1% compared with the index’s 3.5%. Apple, Microsoft, Nike and Deere are among the stocks in this basket.”

I go back to my admission earlier in this piece. If I was courageous I’d be picking some good value stocks right now but if I was chicken, I’d wait until after the midterms.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms