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Monday, December 5, 2022

Bear Market: Did We Hit Bottom in October?

 

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The broad selloff witnessed in the first nine months of 2022 appears to have stalled—at least for now
U.S. midterm elections could give stocks another push in the upcoming months
However, investors must avoid getting too euphoric; risks remain in place

October was a great recovery month for the U.S. stock market, with the S&P 500 jumping 8.8%. November started off a bit slower, with the U.S. benchmark index losing -1.68% in the first five days of trading. However, needless to say, the selloff witnessed during most months of 2022 seems to have paused for the time being.

With the U.S. midterm elections today, we could get another bullish tailwind should we see a change in Congress and Senate composition. Furthermore, the U.S. market has a history of rallying after midterms regardless of the winner.

However, as always, we cannot get euphoric about the current market phase—just as we should not have gotten desperate earlier this year. The key is always to maintain rationality and clarity.

But let’s take it step by step.

Below, I have put the performance of the different asset classes from the beginning of the year to date. As you can see, on the positive side, we find only energy, commodities, and real estate. Among the worst performers are technology and telecommunications.

Bear Market: Did We Hit Bottom in October?Relative Sector Returns in 2022

Source: BofA

Now, is this really a bear market or a correction (very strong, for goodness sake) of the long-term bull market that started back in 2009?

Bear Market: Did We Hit Bottom in October?P/E Ratios in Previous Bear Markets

From the picture above, we see how on average, at the bottom of a bear market, valuations (here, the P/E ratio relative to the S&P 500 index) were around 11.7X on average. Today, in early November, this same value is traveling around 16.7X, meaning that only in 2002 had we had higher valuations at a market bottom.

In all this, let us remember that the worst decline from the highs in this bearish phase was, to date (should the October low be the definitive one), about 27.6%, so a meaningful decline, but compared to the historical data, not so extreme.

Bear Market: Did We Hit Bottom in October?S&P 500 Daily Chart

So again, we are still finding out whether or not the mid-October low was a bottom for the market. However, I have been slowly buying diversified ETFs and individual stocks over the past few months with an eye on the long-term horizon.

I’ve also been buying some individual stocks for the short term, considering that they might be undervalued at current levels, however, with greater due diligence. Recently, I turned profits in both Meta Platforms (NASDAQ:META) and Netflix (NASDAQ:NFLX).

Of course, buying when everything goes up is easier emotionally. The tricky thing is to do it when everything goes down; you might be labeled as crazy for the duration of the bear market, but then you reap the rewards.

As David Rubenstein, the co-founder of Carlyle Group recently said:

“People shouldn’t be afraid of going in and buying things now. The great fortunes in the investment world are often made by buying things at discounts.”

We’ll see if that turns out to be the case this time.

In the meantime, I ask your opinion: Have we reached a bottom?

Write it down in the comments.

Disclosure: The author has closed his positions in both Netflix and Meta. He is currently still long on the S&P 500.

Source: Investing.com

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