Bear markets come in three stages; and we’ve only just

Stocks will start the Black Friday half-session near 10-week highs, having rebounded partly on hopes the Federal Reserve will be slowing the pace of interest rate rises as it waits to see how much previous tightening has impacted the economy.

Investors are thus looking ahead to when the Fed eventually pivots and borrowing costs can start coming down again. For now, they are displaying few concerns about how much damage any economic slowdown may do to corporate earnings.

It’s all too rosy, reckons Peter Boockvar, chief investment officer of Bleakley Financial Group. In an interview with Magnifi+, an AI investing and trading platform, the veteran analyst warns that stocks will grind lower next year, and we have not seen the bottom of a bear market still in its middle phase.

“Bear markets usually come in three stages. The first one is we take a lot of the frothy excesses and euphoria out of the market in terms of the sexy names that we saw in 2021 and we take a PE ratio down. We’ve done that, we went from 22 times earnings, call it 16 to 17,” says Boockvar.

In the second phase, he adds, investors start calculating the economic and company earnings consequences of the ongoing rises in interest rates…”and then the third phase is everyone throws in the towel. No one wants to own a stock again, and that’s your bottom and that’s when you need to be buying stocks hand over fist.”

“I feel like we’re really just only beginning to start that second phase,” he said.

Still, there will be opportunities. It all depends on your time scale, according to Boockvar.

“If you have a big purchase that you have to make within the next year or two, whether it’s a kid going college or it’s a wedding, a bar mitzvah or some other expense like a home that you have put aside money for, it should not be in the stock market. It should be in the bank it should be in short-term T-bills. It should be in cash equivalents because the next couple of years are going to be challenging for those with shorter-term time horizons,” he said.

So, what assets is he interested in? Bonds are attractive, but it’s important to stick to quality.

“You have investment-grade bonds that are yielding 6% and you can do that without taking much duration risk by buying shorter-term durations….And you can buy a short-term, two-year treasury and get a yield of four and a half percent and get some attractive Munis too. So fixed-income land, with shorter durations, I believe, is more attractive. Longer-term trade durations, I’m still more suspect on,” says Boockvar.

And in equities? “Value stocks are much more attractive than growth, the tech stocks. I think commodity stocks are much more attractive than they’ve been over the past five years. Certainly energy, precious metals, even industrial metals like copper stocks.”

If the dollar has peaked and pulls back as the Fed gets closer to the end of its hiking cycle, then Boockvar likes the look of foreign markets, particularly in Asia, and gold and silver once the central bank begins cutting rates.

Finally, the one thing he’s certainly not keen on are techs former darlings. “Just buying Google GOOGL, -2.13% and Amazon AMZN, -2.37% and Apple AAPL, -1.06%, while they’re all great companies, that ship has sailed and the baton in terms of market leadership is going to be passed to other parts of the market,” says the analyst.

Markets

Stocks were in line to start the last trading of the week on the front foot, with S&P 500 futures ES00, +0.42% up 0.2% to 4039 and 10-year Treasury yields TMUBMUSD10Y, 3.715% were little changed at 3.709%. U.S. crude futures fell 0.7% to $79.50 a barrel.

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The buzz

It’s a half-day of trading for Wall Street as many traders also extend their Thanksgiving break. Expect very thin volumes.

Still, analysts and investors are on the lookout for guidance on how the Black Friday sales are going. How is the U.S. consumer holding up in the face of high inflation and sharp increases in borrowing costs? Shares in Amazon AMZN, -2.37% and Walmart WMT, -0.34% were relatively steady.

Shares in Tesla TSLA, -2.90% are up about 2% in premarket action despite news the car company is recalling around 80,000 cars in China.

Activision Blizzard shares ATVI, +0.16% are off more than 3% after a report late on Wednesday that the Federal Trade Commission might block Microsoft’s purchase of the videogame maker.

Fed’s Bullard set to talk inflation, interest rates in MarketWatch Q&A Monday. Sign up here to watch the program and pose a question. 

China’s central bank eased monetary policy as the country struggles with further COVID-19 outbreaks.

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The chart

Here’s an interesting observation on stock volatility from Benedek Vörös, director of Index Investment Strategy at S&P Dow Jones Indices.

“It has been a turbulent year, but a degree of relative calm has returned to U.S. equity markets in the past few weeks, and participants in the options market look even more relaxed than their cash counterparts,” Vörös writes in his latest bulletin.  “VIX, having averaged 3 points above the 21-day realized S&P 500 volatility over the past year, has slipped 6 percentage points below it as of yesterday’s close. Historically, that has had some predictive power for lower volatility to come.”

Source: S&P Dow Jones Indices

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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