Buy the dips as stocks suffer long-awaited correction, strategist says

According to Mehvish Ayub, senior investment strategist at State Street Global Advisors, a correction in many equity markets is expected, but strong fundamentals and company earnings make the current swing a buying opportunity.

Wall Street recouped its losses on Tuesday after US Federal Reserve Chairman Jerome Powell said inflation was still “soft” and embarked on the Fed’s current accommodative policy.

Powell’s comments appeared to allay some of the concerns about looming inflation that drove benchmark 10-year US Treasury yields up sharply and pushed stock markets down to near record highs over the past week. .

Investors fear that a spike in prices due to an impending federal stimulus package, economic recovery and pent-up consumer demand, could force the central bank to increase borrowing costs at short term.

Speaking to CNBC’s “Capital Connection” on Wednesday, Ayub noted that changing financial conditions and improving expectations for growth and inflation had led the US 10-year yield to simply retrace some of the steep decline. observed between December 2019 and June 2020, when the Covid-19 crisis took hold.

“I think the important thing to note is that the Fed has nowhere in its policy suggested that it will remove all financial conditions. It has a target for price stability and for jobs,” Ayub said. .

She noted that core inflation – which excludes food and energy prices – is still somewhat lower, indicating that the current rise in short-term inflation expectations is “likely transitory”.

“We were ripe for a correction in some cases, if you think about the speed and magnitude of the moves we’ve seen in global stock markets,” Ayub said. A correction is generally referred to as a 10% drop in an asset or market from its most recent high.

Many of the tech megastocks that saw stratospheric stock price hikes fuel the stock recovery after the March 2020 slowdown fell victim to the recent shift, with investors turning to more cyclical stocks which tend to align with conditions. economic.

Mikhail Zverev, head of global equities at Aviva Investors, told CNBC on Wednesday that many of those growth stocks – those of companies with large and sustainable positive cash flow, with higher future earnings and growing income. faster than their industry peers – had benefited from the low interest rate environment

“There are a number of high growth names that have had a spectacular 2020, and part of that was surely fundamentals, but a lot of it was positioning based on the view of lower interest rates. longer term, and some have resigned themselves to that, I think, for a long time. “

Tesla is one example, losing 8.55% on Monday for its worst day since September 2020 and leaving the stock down slightly since the start of the year. However, Tesla shares are still up 162.5% from their March 2020 low.

“Over the past few weeks we’ve had some really good fundamentals,” Ayub said. “We have done very well, especially if we look at the S&P 500.”

With around 80% of the companies in the Wall Street flagship index reporting profits at this point, the vast majority have met or exceeded profit expectations.

“The fundamentals out there remain good, and if anything, I think it’s an opportunity to buy from the bottom,” Ayub concluded.