Running the Numbers Transcript

Welcome to RBC’s Markets in Motion podcast, recorded February 28th, 2022. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

This week in the podcast, our latest thoughts on Russia’s invasion of Ukraine from a US equity market perspective.

Three big things you need to know: (1) First, while the duration of growth scares in the S&P 500 since the Financial Crisis has varied, recoveries tend to be quick and powerful. (2) Second, individual investor sentiment took another hit last week and remains below pandemic lows - a contrarian buy signal for stocks. (3) Third, while stocks have fallen a bit more than we expected to start the year and we are mindful of risks to our view, we are sticking with our 5,050 year-end S&P 500 price target for 2022.

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Takeaway #1, while the duration of growth scares in the S&P 500 since the Financial Crisis has varied, recoveries tend to be quick and powerful.

  • As we’ve continued to digest the latest developments in the Russian invasion of Ukraine, and contemplate what it means for the US equity market, we’ve become even more convinced that the most appropriate way to think about this event is by comparing it to the various growth shocks that have occurred in the post Financial Crisis era, as opposed to simply looking at market reactions to past military conflicts.
  • These include the European debt crisis of 2010, the US debt downgrade of 2011, the industrial recession of 2015-2016, and the sell off of late 2018 sparked by QT and the China trade war. All caused fears of recession to rise, though none resulted in one. The 2010 and 2011 shocks took place in the aftermath of a major crisis when markets still felt fragile in terms of the investor psyche. The 2018 China trade war was geopolitical in nature with ramifications for the global economy but also had the backdrop of aggressive Fed tightening layered in.
  • The average peak to trough drop in the S&P 500 ranged from 14-20% around each of these events, and averaged 17.3%. At its recent low, the S&P 500’s current drawdown wasn’t quite back to that territory.

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  • We took a look at what happened after the stock market bottomed in each of the previously mentioned growth scares. Interestingly, though the duration of the drawdowns varied, ranging from 2 to 9 months, there was a remarkable degree of consistency in the time it took for the stock market to return to pre crisis highs, just 4 to 5 months. Six to 12 months later, the total recovery off the trough averaged 24-30%.

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Takeaway #2, individual investor sentiment took another hit last week and remains well below pandemic lows - a contrarian buy signal for stocks.

  • Geopolitics do appear to matter to the American psyche. Biden’s polling numbers fell sharply last August as the US announced it’s withdrawal from Afghanistan.

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  • Not surprisingly, individual investor sentiment also took yet another hit in last week’s AAII update. As of 2/24/2022, net bulls were at -30.3% on a weekly basis, the lowest level we’ve seen since April 2013 and well below pandemic lows of -29%. On a four-week average, this indicator is now at -20.7%. This suggests stocks are already deep in oversold territory since below the -10% threshold the S&P 500 has been up 15% on average over the next 12 months 86% of the time.

Takeaway #3, while stocks have fallen a bit more than we expected to start the year and we are mindful of risks to our view, we are sticking with our 5,050 year-end S&P 500 price target for 2022.

  • Stressful, emotional times in the stock market require a calm review of the numbers. We worry that there’s simply too much we don’t know about how the current geopolitlcal crisis will develop and that the investment community and Corporate America are in the early days of understanding all of the derivative impacts of unfolding events.
  • But after more than 20 years of covering stocks through the Tech bubble, 9-11, the Financial Crisis, the trade war, and the pandemic, we also know that bottoms in the market feel frenzied and absolutely terrible. Our sentiment analysis and our work showing how quickly stocks tend to recover from growth scares is telling us to be on the lookout for a positive inflection in the stock market, even if it is not at hand just yet.
  • And on this point, it’s worth noting that if the S&P 500 ends up falling a total of 17.3% from its early January high to 3,967 (in line with the average growth scare drop), then rebounds 27.8% over the next 10 months (it’s average 10 month gain post a growth scare trough), it would get to 5,070 around year-end – right in line with our 5,050 year-end price target.
  • The possibility that the US economy might get pulled into a recession, or something close to one, due to an overly aggressive Fed and derivative impacts from Russia’s invasion of Ukraine is clearly the main risk to our view. But for now, we see this as a risk to monitor with vigilance, not an assumption that ought to drive our base case, particularly since our US economics team is sticking with their call for only four hikes form the Fed this year.

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That’s all for now. Thanks for listening. And be sure to check out our sister podcast.