Ominous clouds hang over the stock market and investors should exercise caution. As March approaches, it is important to be prepared for greater volatility caused by the Federal Reserve and international conflicts. It’s also important to keep your eyes peeled for opportunities to buy good stocks at a discount. Here are my three biggest predictions for March.
1. The market will lose earnings support
Earnings season is almost over, which is bad news for the stock market. So far, 95% of S&P500 companies have published their results for the fourth quarter. More than three-quarters of them exceeded Wall Street expectations for sales and earnings. The 30% average earnings growth rate for the S&P 500 was nearly 8% higher than analysts’ estimates.
Importantly, consumer discretionary and technology stocks have been particularly strong. These sectors tend to be volatile during turbulent markets, so these positive results likely created a lot of stability.
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Unfortunately, there won’t be much news on company fundamentals in March. Instead, stocks will move due to macroeconomic and financial market trends. This portends tough times for investors.
Interest rates are rising, the conflict in Ukraine is creating significant geopolitical tensions and investors are withdrawing capital from the stock market in favor of less risky asset classes. These factors all tend to hurt stocks, and none of them will be completely resolved within a few weeks. Economic data such as inflation, unemployment and confidence ratings will receive particular attention. All of this news could go either way, but further volatility is likely.
Even a fantastic earnings season was not enough to propel the major indices much higher. The market reacts more strongly to bad news than to good news. Bad income reports are punished to a greater extent than good income reports are rewarded.
This is strong evidence of continued downward pressure in the market. The good news from earnings season is behind us, and anything supporting stock prices is fragile at best.
2. Fed updates will be crucial
The Federal Reserve Open Market Committee (FOMC) is due to meet again on March 15-16, and investors will tune in to the press conference for information. Rate hikes are a hot topic as monetary authorities struggle to contain inflation. Any indication that interest rates will rise faster than expected is likely to push the market lower. If the Fed’s commentary suggests that rate hikes will be less extreme than expected, stock prices could jump higher.
Inflation has tracked higher than most forecasts since the last FOMC meeting was held in January. This inflation data has been digested by investors, but everyone is still waiting for comments from the Fed to confirm expectations. Consumer prices continue to put pressure on the Fed, so the timing of the rate hike is unlikely to be extended.
Still, this is new information relative to expectations, so it could go either way – just be prepared for a significant move up or down mid-month. Growth stocks will react with particularly high volatility.
3. There will be interesting buying opportunities in March
Market valuations have reached unsustainable levels during the pandemic rally. Low interest rates and high risk appetite have pushed stock prices to all-time highs relative to earnings, sales, dividends, book value and cash flow. Rising interest rates and more conservative attitudes towards risk are reversing this trend.
The S&P 500 is nearly 10% below its all-time high, and growth stocks are hurting the most. Tech Giants Alphabet, Microsoft, Amazonand Apple are down at least 7% since the start of the year. It’s much worse for netflix, Metaplatformsand You’re here.
Meanwhile, many of the pandemic darlings in the cybersecurity and work-from-home sectors have fallen 20% to 30% in 2022. At some point, the valuation pendulum will swing and price rationalization will turn in undeniable discounts. There are signs that we are getting closer to that point.
The S&P 500’s forward PE ratio just hit pre-pandemic levels, and it’s only 10% above the long-term average level. The S&P 500’s average dividend yield is also up, as the chart shows, even though the index is dominated by tech stocks that don’t pay dividends.
A correction that brought stock prices closer to fundamentals was long overdue, and investors shouldn’t panic now that it’s happening. It could be months before the market returns to steady growth, but this is only a temporary downside for long-term investors. If the market continues to decline in March, some of the hardest-hit stocks will move into “must-have” territory.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Ryan Downie owns Alphabet (A shares), Amazon and Microsoft. The Motley Fool owns and endorses Alphabet (A shares), Amazon, Apple, Meta Platforms, Inc., Microsoft, Netflix and Tesla. The Motley Fool recommends Alphabet (C-shares) and recommends the following options: $120 long calls in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.