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 It may get worse before it improves: shares still are pricey and
investors who say they can't calibrate geopolitical woes such as a
weakening China and a North Korean hydrogen bomb test are sticking
to the sidelines for now.
But the sluggish start doesn't necessarily point to a year of
losses. January often is a bad month for stocks and all of the
recent selling has beaten down some shares low enough to interest
selective investors.
The average stock in the S&P 500 is off almost 19 percent from its
52-week high, resulting in a bear market for most stocks but also
suggesting there are a wide swath of stocks that have been beaten
down and may be able to provide value, said Jeff Saut, chief
investment strategist at Raymond James Financial in St. Petersburg,
Florida.
"There are very legitimate reasons for concerns. You could argue the
market response has been very rational. At the same time, how much
have things really changed? I would argue not much," said Brad
McMillan, chief investment officer for Commonwealth Financial in
Waltham, Mass.
"I could make a case that we could may see a number of positive
surprises here in the U.S.", he said.
U.S. stocks still appear to be expensive, with the forward price
earnings ratio of the S&P 500 at 16.4, below the 17.4 reached in
March but still at highs not seen since 2004.
But those valuations could be exaggerated by a smaller group of
stocks that have driven the S&P over the last year and are priced
richly. Amazon <AMZN.O>, part of the so-called "FANG" group of
stocks that helped keep the S&P 500 near steady in 2015, has a PE
for the next 12 months of 114.3, for example. Netflix <NFLX.O> is
even higher, showing a ratio of 368.5 for the next 12 months.
But that doesn't mean investors should blindly buy any stocks that
have lost ground, according to Randy Frederick, managing director of
trading and derivatives for Charles Schwab in Austin, Texas.
"The problem with things that are cheap is that they can always get
cheaper," Frederick said.
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The technical picture for stocks has also deteriorated, as losses on
Wednesday pushed the S&P 500 below a key support level around the
1,990 mark which could result in a full retest of its August lows
near 1,870, according to Saut. Those August lows were also triggered
by worries over China.
"I don’t know how to handicap the Saudi Arabia and Iran war, an
H-bomb in Korea, so I am not doing anything right here," said Saut.
The declines have also raised concerns that a weak January could
result in a down year for stocks, but there is scant evidence for
that idea. The current bull market, now nearing its seventh year,
has shown resilience for several years running, and historic data
shows that a bad start does not a bad year portend. And January is
often grim: in one third of the years since 1945, shares in the S&P
500<.SPX> hit their yearly lows in the first month of the year, said
Sam Stovall of S&P Capital IQ.
With all the headwinds potentially facing stocks this year, it's not
time to give up on them, but to be more selective, said Kim Forrest,
senior equity research analyst, Fort Pitt Capital Group in
Pittsburgh. She is looking at names in the retail, technology and
materials sectors, looking for companies that are gaining market
share.
"My sunshine is out there," she said.
(Reporting by Chuck Mikolajczak; editing by Linda Stern)
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