Traders work on the floor of the New York Stock Exchange.
NYSE
A correction in many equity markets was delayed, but the company’s solid fundamentals and earnings mean that the current swing is a buying opportunity, according to Mehvish Ayub, senior investment strategist at State Street Global Advisors.
Wall Street recovered its losses on Tuesday after Federal Reserve Chairman Jerome Powell said inflation was still “low” and committed to the Fed’s current accommodative policy.
Powell’s comments seemed to alleviate some of the concerns about impending inflation that led to a sharp rise in 10-year US Treasury yields, and brought the stock markets down to near-record highs last week.
Investors fear that a price hike due to an impending federal stimulus package, the economy’s reignition and pent-up consumer demand may force the central bank to increase short-term borrowing costs.
Speaking to CNBC’s “Capital Connection” on Wednesday, Ayub noted that the change in financial conditions and the improvement in growth and inflation expectations led the 10-year US yield to simply redo part of the sharp decline he saw between December 2019 and June 2020, when the Covid-19 crisis began.
“I think the important thing to note is that the Fed has not suggested in any part of its policy that it would suppress all financial conditions. It has a goal for price stability and employment,” said Ayub.
She noted that the core of inflation – which excludes food and energy prices – is still slightly lower, indicating that the current increase in short-term inflation expectations “is likely to be transitory”.
“We were ready for a correction in some cases, if you think about the speed and magnitude of the movements that we saw in the global stock markets,” said Ayub. A correction is generally referred to as a 10% drop in an asset or market from its most recent rise.
Many of the tech megastocks that saw stratospheric increases in stock prices spurred the stock market recovery after the March 2020 recession, have been victims of the recent shift, with investors looking for more cyclical stocks that tend to align with economic conditions.
Mikhail Zverev, head of global equities for Aviva Investors, told CNBC on Wednesday that many of these growth stocks – those of companies operating significant and sustainable positive cash flow, with higher future earnings and faster-growing revenues that their industry peers – benefited from the low interest rate environment
“There are a number of high-growth names that have had a spectacular 2020, and some of them have certainly been key, but a lot of that has been the positioning based on the view of lower to longer interest rates, and some have relaxed with that, I I think, very late. “
Tesla was an example, losing 8.55% on Monday on its worst day since September 2020 and leaving stocks low since the turn of the year. Tesla’s shares are still up 162.5% from the March 2020 low, however.
“In the past few weeks, we have had very good fundamentals,” said Ayub. “We’ve made really good gains, especially if we look at the S&P 500.”
With about 80% of Wall Street’s top blue chip companies reporting profits at this stage, the vast majority met or exceeded profit expectations.
“The fundamentals there remain good, and if there is anything, I think this is an opportunity to buy in the depression,” concluded Ayub.