The first half of 2022 has seen a lot of red for stocks. The S&P 500 (^GSPC) posted its worst performance since 1970 and officially slipped into bearish territory in June 2022.
But Evercore ISI’s Rich Ross sees green in the market for the rest of the year.
“For the first time in quite some time, those downward forces, which have been the drivers, the headwinds for equities – the engine of the bear market – are starting to pull back, and it’s clear that equities are feeding off of that. mighty July,” Ross told Yahoo Finance Live.
Ross cited increases in yields, crude oil and inflation as key drivers of the bear market. Since July 2020, the yield on 10-year Treasury bills (^TNX) has fallen from 55 basis points to a peak of 3.43% in June 2022. Crude oil prices (CL=F) have reached north $120 a barrel this year, its highest level since March 2012.
Over the past month, these indicators have contracted. US crude oil fell below $90 a barrel on Thursday and the 30-year fixed rate mortgage (FRM) fell below 5%. In July 2022, the S&P 500 (^GSPC) rose 9.2%, marking the best month for the index since November 2020.
Ross also noted a correlation between falling oil prices and rising stock prices.
“In the current environment, lower yields are good for the consumer and the stock market, driven largely by tech growth and consumer stocks at the index level,” Ross said.
However, Ross warned that an economic slowdown – which Evercore ISI does not anticipate – could be a bad sign for stocks. “There could be a time in the future where you will see diminishing marginal returns due to weakness in crude,” Ross explained.
Ross has his eye on consumer discretionary products, semiconductors and software.
“There is no sector [like consumer discretionaries] it may be better positioned to benefit from some of the weakness we see from this top-down macro on crude, inflation and interest rates,” Ross noted.
Consumer discretionary products came out of their trough a few months ago. SPDR Consumer Discretionary Fund (XLY) is up 16% from July 2022.
Ross used the bear market of the 1970s to illustrate why investors should be looking to buy.
“Let’s compare and contrast the ’70s, a decade that a lot of people compared this to because of inflation, crude oil, geopolitics, civil unrest so to speak. In the 70s, that first bear market took you down about 30%, and within a year you had recouped 90% of those losses,” Ross explained.
Ross considers $4,600 for the S&P 500 (^GSPC) and $15,000 for the Nasdaq 100 (^NDX) to be reasonable price targets for the coming months.
“I’m telling you we’re probably in a cyclical bull market now that the bear market that started in January, February at the index level is over. The lows are here and we should now be buying dips rather than selling tears as has been the case for the past six months,” Ross said.
Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22
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