Don’t fight the Fed while the risks are down

  • The investment strategist who bottomed in the stock market in mid-June sees reason to be cautious.
  • Truist co-chief IT officer Keith Lerner told Insider that risks are biased to the downside as the S&P 500 encounters technical resistance.
  • “What’s holding us back is central bank tightening and valuations aren’t that compelling,” Lerner said.

Navigating the highs and lows of the stock market is no easy task, especially in a bear market that has already seen three separate rallies of up to 10% that ultimately failed and led to lower lows.

In mid-June, Truist Bank co-CIO Keith Lerner told Insider that the stock market presented a rare buying opportunity after the S&P 500 posted one of the most extreme oversold readings in 30 years, measured by the percentage of stocks above their 50 days. moving average.

Now, after a 14% rally in the S&P 500 and a 20% rally in the Nasdaq 100 since mid-June, investors are wondering if this is another rigged rally or the start of a new market. sustainable bullish.

For now, this is likely another false rally, as the stock market’s risk-reward profile slightly favors the downside, according to Lerner.

In an interview on Thursday, Lerner told Insider he sees the S&P 500 consolidating sideways, sandwiched between its rising 50-day moving average and falling 200-day moving average as a likely near-term scenario.

At the same time, the S&P 500 is running into technical resistance, valuations are “pretty full” and the Federal Reserve is expected to continue to tighten monetary conditions via interest rate hikes and a near balance sheet reduction. $9 trillion, which is just getting started, Lerner said.

And Friday’s strong jobs report only reinforces the idea that the Fed is likely to continue raising rates for the foreseeable future, even if some interpret Chairman Jerome Powell’s comments at the FOMC meeting in July as a potential pivot.

“What’s holding us back is central bank tightening and valuations aren’t that compelling,” Lerner said, adding that ongoing interest rate hikes mean the V-shaped rally in prices stocks that investors have grown accustomed to in recent years are unlikely to happen this time around. around.

But Lerner’s approach of combining both fundamental and technical analysis in his research process means he’s not ignoring the possibility of resilient corporate earnings and improving economic data. could ultimately pave the way for an upward push.

“Where could we go wrong? Really, more than a pivot from the Fed is that the odds of a recession are well below 50% and ultimately not materializing,” Lerner said.

Essentially, a successful soft landing from the Fed.

“We’re avoiding a recession and a lot of the weakness we’ve seen is really more of a symptom of the unwinding of this huge stimulus, and it’s still strong growth. I think that’s the case bullish, than earnings are going to stay much stronger than expected,” Lerner said.

On a sector basis, Lerner recently upgraded the tech to neutral as it shows signs of a comeback amid easing inflation expectations and a significant drop in interest rates from their highs. cycle reached in June.

“We are looking for more of a digestion period for large-cap tech stocks for an opportunity to upgrade again,” Lerner said.

Truist is bullish on the healthcare sector because it’s “an attractive area that has growth and value characteristics and tends to perform well in a choppy market environment,” Lerner said.

Ultimately, as investors navigate continued market volatility, there’s no reason to be a hero at current levels betting on a big upside move, according to Lerner.

“For investors who are over-allocated to equities relative to their long-term goals, we believe this would be a more reasonable place to reduce exposure,” Lerner said.

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