7 min read

Stocks: Bouncy or Bubbly?

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Happy Thursday!

While Hollywood gazed into the crystal ball this week to predict Golden Globe winners, financial analysts were busy forecasting what the latest Labor Department numbers mean for the economy in the months ahead. A Goldilocks job report showed that 2022 was a near-record year for job growth, and the unemployment rate fell to 3.5% — matching a five-decade low. But wage growth also cooled in December, suggesting that inflation may have peaked — and that has experts predicting that the Fed may start slowing down its rate hikes. This morning, we got confirmation that inflation is indeed slowing, declining for a sixth straight month after June’s peak, while the consumer price index rose 6.5% in December. This is well below June’s report of 9.1%.

With several big banks kicking off earnings season tomorrow (including JPMorgan, Bank of America, Wells Fargo, and Citigroup), we should get some more clues as to the state of the economy. While more experts are suggesting that we may be able to avert a major recession this year, there are still plenty of reasons for investors to stay cautious, particularly when so many are lowering their growth forecasts in 2023. Below, we have some ideas on how to navigate the stock market in this moment of uncertainty.

Finally, we’d be remiss not to mention all of this week’s climate news. A new report shows that US greenhouse gas emissions were up 1.3% in 2022, indicating that we still have much progress to make on decarbonization. Meanwhile, California residents are experiencing torrential rain that scientists blame partly on our changing climate. But it’s not all doom and gloom. We were thrilled to see the new UN report announcing that our efforts to save the ozone layer are working. It’s further proof that collective action to impede an environmental crisis can work, and if that’s not a reason for optimism, we don’t know what is.

News you can use

Graphic of newspaper with magnifying glass

Bank of America, NVIDIA, Microsoft, Accenture, and Truist are America’s Most JUST Companies this year, says JUST Capital. Verizon, Hewlett Packard Enterprise, Apple, Intel, and JPMorgan Chase rounded out the top 10. The independent nonprofit, which we think should be part of every FWIW reader's suite of research tools, asks Americans what matters most when it comes to business behavior and measures how companies perform on those issues. Fair wages, job creation, and ethical leadership topped this year’s poll. Check out the complete list of company rankings.
What will future gizmos look like on a warming planet? CES 2023 was chock-full of examples. A robot to precisely fertilize seeds from John Deere, a bioengineered “air purifier” houseplant from startup Neoplants, solid-state battery cells from Mercedes Benz-backed Factorial Energy, sustainable-material tires from Goodyear, and many electric vehicles (including a color-changing sedan from BMW) were among the innovations showcased. Looking for new ideas and companies to watch as you think long-term? Read more about environmental tech innovations featured at CES.
A bunch of new ESG funds are in the works for 2023, including one from the famed activist investor that took on Big Oil and won. Engine No. 1 has filed paperwork for the new Transform Scarcity ETF that will invest in food, agriculture, water, land companies focusing on sustainability and transforming scarce resources. A climate action equity ETF from Xtrackers will track the MSCI USA Climate Action Index. The Global X Carbon Credits Strategy ETF will track carbon credit futures.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

Some of our favorite inflation-fighting strategies (and a few more)
Unpacking the ESG Alphabet Soup (including a link to our ever-growing glossary of common terms)
Investing in Women: A Guide to Gender Lens Investing
How to Practice Faith-Based Investing
“Siri, What Is a Recession?”

Buying the dip, not the bubbles

We began 2023 nervous and trying to keep our expectations low, but the stock market has been roaring back since then, with beaten-down growth stocks leading. Some investors are feeling optimistic about inflation easing and the Fed avoiding a recession. History is in their favor, too. “Since 1928, the S&P 500 Index has only fallen for two straight years on four occasions: The Great Depression, World War II, the 1970s oil crisis and the bursting of the dot-com bubble at the start of this century,” reported Bloomberg.

Stocks on sale?

The stock market has fallen significantly from its all-time high in January last year. To those believing the market will eventually recover, stocks are discounted right now and could present a buying opportunity for investors with long-term investing goals, which is why you’ll hear the phrase “buy the dip” pretty often these days.

“Through many economic downturns, recessions, and geopolitical crises over many decades, the stock market has always recovered,” wrote LPL Research analysts in their 2023 market outlook. “Those patient and courageous investors who were able to take advantage of those declines have usually been rewarded nicely. Following down years, the S&P 500 has risen an average of 15% with positive returns in 15 out of 18 years.”

But “buying the dip” isn’t without dangers. There’s no saying how long stocks will decline, so don’t part with money you’ll need short-term. Trying to time the market and only investing during “dips” produces poor results compared to investing regularly regardless of market conditions, aka dollar-cost averaging. You could also, as another investing adage goes, “catch a falling knife.” (Ouch!)

Bubbly risks

Certain stocks currently trading much lower than their peak may be popped bubbles. In financial jargon, a bubble is the rapid, unsustainable increase in an asset’s price. As the price climbs, it becomes detached from its underlying business and fundamental values. More and more investors pile in, speculating it will keep rising so they can sell for a profit, until there’s a crash. Financial bubbles have occurred for centuries (ever heard of Tulip mania?) and even inspired poetry. An echo bubble is a short rally that occurs after the original bubble has burst.

In your hunt for a bargain, you want to avoid picking up these frothy stocks. “The psychology behind bubbles is powerful,” wrote Financial Times Contributing Editor Ruchir Sharma. “People refuse to easily abandon the idea that inspired the bubble. They buy the dips and give up only after their faith has been deflated repeatedly. 2023 is likely to see more echo bubbles, including in the most hyped themes of the last decade: big cap tech in the US and China. But don’t be fooled again. The next big winners will be emerging elsewhere.”

It's impossible to know for sure what’s a bubble and what’s a “buy the dip” opportunity. Here are a few tips to help:

Fundamentals, not FOMO: Focus on company fundamentals — like profits, revenue, growth outlook, and management — not hype. Trying to make a quick profit off frenzies like meme stocks is a mistake. Read Wall Street analyst reports and tune into financial earnings coverage to know more about a firm’s strength and long-term potential. If a company has an unproven product, but you like their story and mission, make sure your allocation fits your risk tolerance.

CNBC recently identified 12 “cheap stocks” for 2023 by looking at their performance, earnings forecasts (forward P/E), analyst ratings, and analyst price targets. Their list includes Amazon, Visa, T-Mobile, Walt Disney Company, Salesforce, Prologis, Monolithic Power Systems, Schlumberger NV, Halliburton Company, Delta Air Lines, Steris, and Alaska Air Group. For Morningstar’s take on this, check out their article on 33 Undervalued Stocks.

Avoid concentration of megacaps: US tech giants have solidified their status as winners in investors’ minds for years now, and small investors have been aggressively “buying the dip” when they faltered. According to Vanda Research data cited by The Wall Street Journal, retail investors bought more Tesla shares over the last six months than the 60 months prior, even as the stock fell around 50% (as this chart shows). Apple and Tesla made up a whopping 34% of the average retail investor’s portfolio at the end of September.

If you “buy the dip” on tech giants, make sure to not go overboard and put all your eggs in a few baskets. Regularly rebalance because market dominance can fade over time. This great animation shows how the ten biggest companies in the world changed over the last two decades, with the likes of General Electric, Intel, Cisco, Walmart, Exxon Mobil, and Chevron all getting displaced at different points. (For those of you who want to go back to 1980, here’s a video and an image.)

Look to the future: Identifying undervalued stocks with potential to surge once the economic climate turns favorable isn’t easy, even for the experts. But you can explore different trends you’re interested in, like the green transition and sovereign energy independence or water and waste management. Look to disruptors in fields like artificial intelligence and machine learning or target providers of “mission-critical” services that can weather an economic storm, like Wells Fargo analyst Michael Turrin, who highlighted Snowflake.