This year has been a difficult one for many investment markets, including the ASX share market.
What's the best time to buy during this volatility? If we had a crystal ball, that'd make it obvious where the bottom of the decline is.
Some readers may have heard of the phrase about trying to catch a falling knife. Something that has fallen by 50% from $1 to 50 cents could easily fall another 20% to 40 cents. Just because something has fallen heavily doesn't mean it can't keep falling.
One investment expert has shared a couple of tips on how to identify when we could have reached the bottom.
Are we there yet?
Lisa Shalett is the chief investment officer of wealth management at Morgan Stanley.
She believes that we are "not quite" at the bottom. Morgan Stanley's global investment committee believes this latest bounce is "temporary, driven by technical factors, and that the bear-market bottom is still to come".
Shalett pointed out that the decline in valuations we're seeing is because of central banks increasing interest rates, rather than an economic crisis. This matters, in her opinion, because monetary policy was able to be used as an antidote to prior bear markets like the COVID-19 crash and the GFC.
This type of bear market tends to be "more prolonged".
What could help drive a recovery for the (ASX) share market?
There were "at least two" necessary conditions for reaching the bottom.
Shalett explained:
First, inflation needs to reach a viable peak. We may reach that soon. Although uncertainty remains, we see solid indications of both softer demand and more supply, suggesting that inflation is poised to decelerate in the months ahead.
Importantly, while peak inflation, and in turn, peak policy rates, may be sufficient to bring the bond market to a bottom, that likely won't be the case for stocks.
Stocks may need to fall farther, based on a sober assessment of year-ahead corporate earnings potential.
In other words, overly optimistic stock investors and Wall Street analysts must realistically factor in the potential depth and breadth of an economic slowdown and the consequent hit to employment and consumer demand. That forecast reset has just begun, yet the 2023–2024 earnings picture is still far from clear.
Where are the opportunities?
Shalett said that investors should "remain patient" and avoid chasing index-level bear market rallies.
She suggested that businesses in healthcare, financials, energy, industrials and defensive, which have above-average dividend yields, could be promising.
However, investors might be missing out on opportunities by waiting too long, as the Motley Fool's Bruce Jackson pointed out. He also warned about the folly of trying to predict when news stories (macro factors) are going to impact the share market, and thinking that can inform people about when to "jump in and out of the market".
Jackson wrote:
Would your macro "analysis" have told you to jump back into stocks on October 1st, in advance of the big rally for that month?
And would your analysis now tell you to stay in, get in, get out or something in between?
I'd suggest it's a futile exercise at best, and likely a sub-optimal investing strategy.
If you invest in the stock market, you should make it a lifelong endeavour, not something you jump into and out of depending on your mood, the market's mood, or the macro environment.
In other words, if an investor sees an opportunity with an ASX share, it may be worth jumping on it. That bargain may not always be there. Plus, time in the market beats timing the market.
For me, a name like Wesfarmers Ltd (ASX: WES) could be something to like, with its diversified business operations, good dividend yield, investing in new areas for growth (lithium and healthcare) and its 25% decline this year.
