In the first half of 2022, there was a lot of red for equities. The S&P 500 (^GSPC) recorded its worst performance since 1970, officially entering bear market territory in June 2022.
But Rich Ross of Evercore ISI sees green in the market for the rest of the year.
“For the first time in quite some time, those top-down forces that have been the driving forces, the headwinds for equities – the driving force behind the bear market – are starting to abate, and it’s clear that equities feed on that which comes from a powerful July,” Ross told Yahoo Finance Live.
Ross cited rises in interest rates, crude oil and inflation as the main drivers of the bear market. Since July 2020, ten-year government bond yields (^TNX) have risen from 55 basis points to a peak of 3.43% in June 2022. The price of crude oil (CL=F) has reached more than $120 a barrel this year, the highest level since March 2012.
Over the past month, these indicators have shrunk. US crude fell below $90 a barrel on Thursday and the 30-year fixed-rate mortgage (FRM) fell below 5%. In July 2022, the S&P 500 (^GSPC) rose 9.2%, the index’s best month since November 2020.
Ross also noted a correlation between lower oil prices and higher stock prices.
“In the current context, lower returns are good for consumers and the stock market, driven in large part by technology growth and consumer stocks at the index level,” Ross said.
Ross cautioned, however, that an economic downturn — which Evercore ISI is not predicting — could be a bad sign for stocks. “There may come a time in the future where you get diminishing marginal returns from weakness in crude oil,” explains Ross.
Ross has his eye on consumer goods, semiconductors and software.
“There is no sector [like consumer discretionaries] that might be better positioned to take advantage of some of the weakness we’re seeing from that top-down macro for crude oil, inflation and interest rates,” Ross noted.
consumer cyclicals have bounced back a few months ago. The Consumer Discretionary Select Sector SPDR Fund (XLY) is up 16% from July 2022.
Ross used the bear market of the 1970s to illustrate why investors should buy.
“Let’s compare it to the 1970s, a decade that many people have compared this to because of inflation, crude oil, geopolitics, civil unrest as it were. In the 1970s, that first bear market was about a 30% loss, and within a year you had made up for 90% of those losses,” explains Ross.
Ross considers $4,600 for the S&P 500 (^GSPC) and $15,000 for the Nasdaq 100 (^NDX) as reasonable price targets for the coming months.
“I’m telling you we’re probably in a cyclical bull market now that the bear market that started at the index level in January, February is over. The lows are in and we should now be buying dips instead of selling rips, as has been the case for the past six months,” Ross said.
Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22
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