Despite the latest rallies in recent days, the broader market has been hit hard this year. The S&P500 is down 22% since the start of 2022, but there are signs that the bulls will overtake the bears in the new year.
“A consecutive decline of 20% per year is very rare,” John Davi, founder and chief investment officer of Astoria Portfolio Advisors, told Bob Pisani on CNBC’s “ETF Edge” on Monday. “You have to go back to the 1930s, [where] we’ve had two consecutive years of 20% declines.”
Davi said that while many investors have adopted bearish strategies this year, Astoria has positioned itself defensively heading into 2022 with inflation-fighting strategies.
“Most of our exposures were about the quality factor,” he said. “We hold a lot of short-term, cash-like bonds. So on a relative basis, our clients have experienced different portfolio returns this year versus a benchmark.”
But Davi warned that Astoria advisers are not oblivious to the risks the market faces in the months ahead, such as a possible earnings slump or a UK pension fund crisis.
“Our watchword is to start snacking,” he said. “Nibbling on stocks, high-quality stocks. Look at bonds – because bonds now pay attractive coupons – with the goal of trying to deploy that money in the next three to six months. And that’s a very different.”
In a 2016 interview with CNBC’s “Power Lunch,” the late Jack Bogle said investors considering selling amid the current market turmoil should resist the urge.
“You just have to stay the course,” he said. “Don’t do anything, just stand there. It’s speculation we see out there, and you can’t respond to it.”
Pisani referenced the legend of late investing while pointing out that the direction of the S&P has always been bullish.
“It’s up 3 out of 4 years,” he said. “Seventy-two percent of the time, the S&P 500 has been higher year over year since the 1920s.”
Pisani added more market stats from Bogle, citing the 56% of the time the index is up 10% year over year. And the reason for the recovery trend, he said, is simple: capitalism.
“Especially the relentless efficiency of American corporations,” Pisani said. “Capital allocation is why the United States is doing so well.”
But the baseline scenario for the future of the S&P 500 over the coming year is yet to be determined, and the final months of 2022 have the power to determine where the markets go from here.
“I think there’s a downside risk that earnings could potentially be worse than expected,” Davi said. “But I think inflation is what got us into this bear market recession.”
“To think there’s another 10-15% drop in the S&P means you think we’re going into a prolonged, prolonged recession,” he said. “I don’t see that.”
Davi said he had a more constructive outlook for the index, with the S&P falling in the 5%-10% range as forward-looking inflation indicators, like gasoline and commodities, hit the lows. break even.
“We try not to predict what’s going to happen,” he said. “Buy high-quality stocks, buy value stocks. Liquid as a margin of safety. A PE ratio of ten to 11 times for value stocks, I think, is sufficient.”
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