Traders work on the trading floor of the New York Stock Exchange.
A pullback in many equity markets was long overdue, but strong fundamentals and corporate earnings mean the current wobble is a buying opportunity, said Mehvish Ayub, senior investment strategist at State Street Global Advisors.
Wall Street recovered its losses on Tuesday after Federal Reserve Chairman Jerome Powell said inflation was still “weak” and subscribed to the Fed’s current accommodation policy.
Powell’s comments seemed to allay some of the concerns about impending inflation, which pushed 10-year US Treasury yields up sharply and brought equity markets down from near record highs last week.
Investors feared that a price spike due to an upcoming federal stimulus package, economic recovery and pent-up consumer demand could force the central bank to raise short-term borrowing costs.
Speaking to CNBC’s “Capital Connection” on Wednesday, Ayub noted that the change in the financial position and the improvement in growth and inflation expectations have meant that the US 10-year yield is simply part of the sharp decline between December 2019 and June 2020. when the Covid-19 crisis hit.
“I think the most important thing is that nowhere in its policy has the Fed proposed suppressing all financial conditions. It has a goal for price stability and employment,” said Ayub.
It noted that core inflation – which excludes food and energy prices – is still slightly lower, suggesting that the current rise in short-term inflation expectations is “likely temporary”.
“We were ripe for correction in some cases, given the speed and extent of movement we have seen in global equity markets,” said Ayub. A “correction” is commonly referred to as a 10% decline in an asset or market from its last high.
Many of the tech megastocks, where stock prices have risen in the stratosphere, have fueled the recovery in stock markets after the March 2020 downturn. They were victims of the recent shift, and investors sought more cyclical stocks that tended to match economic conditions.
Mikhail Zverev, head of global equities at Aviva Investors, told CNBC on Wednesday that many of those growth stocks – companies with significant and sustained positive cash flow, higher future earnings and faster-growing sales than industry peers – have benefited from a low-interest environment
“There are a number of high-growth names that have had a spectacular 2020 and some of them were certainly fundamentals, but many of them were based on the lower, longer-term interest rate view and some are relaxing, I think, long overdue.”
Tesla was one example of this: on Monday, it lost 8.55% for the worst day since September 2020, and has dropped the stock slightly since the turn of the year. However, Tesla stock is still up 162.5% from the March 2020 low.
“In the last few weeks we actually had very good foundations,” emphasized Ayub. “We got really good results, especially when we look at the S&P 500.”
With around 80% of the companies in the Wall Street flagship blue chip index reporting profits at this point, the vast majority have met or exceeded profit expectations.
“Fundamentals remain good there and if anything I think this is an opportunity to buy on the go,” concluded Ayub.