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Equities Investment Outlook: October 2022

By Richard "Crit" Thomas, CFA, CAIA
U.S. Equities
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October 2022 Equities

US Equities

US Equities have again sold off and are re-testing their June lows. We are in a bear market. But for longer term investors Bear markets do spell opportunity as it is a relatively rare occurrence and have historically been a great opportunity to pick up stocks on the cheap. 

That is our bias, we want to take advantage of this market downturn and add some risk. But that raises the question of which assets and when do we buy them? Right now the question of which assets is probably the easier of the two. 

We have done a lot of work on market cycles to help determine how different asset classes have historically performed in each stage.

Equities October 2022

Looking forward, ultimately we want to start to position in those asset classes that tend to perform well in the next stage –the early cycle … Historically small and mid caps have led the market out of a downturn and often that outperformance even extends into the mid cycle. 

But do valuations allow us the ability to start positioning into those asset classes? Currently small and mid caps are very cheap on a P/E basis, both absolute and relative to large caps.Equities Chart October 2022

This chart looks at historical P/Es for the S&P size indexes. Note how they are near all-time lows, and selling at a discount to large caps. Still small and mid cap companies do tend to be more economically sensitive and the economy is slowing - so we do see earnings risk, but the lower valuations suggest we are being better compensated for that risk; so we are biased in that direction.

But we will also want to eventually get to an overall equity overweight versus fixed income. Currently we are sitting at a neutral, strategic weight. This brings in the question of when, and it is the more difficult question as it implies market timing. Unfortunately market timing is much more a function of luck than it is skill. So recognizing that we won’t be able to perfectly time the bottom how do we approach it?

Equities-Chart-Oct-3We are looking for a confluence of things. One is valuation, and for large caps, unfortunately we are not close to past bear market lows. Another factor is whether we are seeing more realistic investor expectations. Certainly a recession is becoming most investors’ base case, that is good, but it has yet to feed into earnings expectations. 

Equities Chart 4 October 2022

Bottom up analysts estimates suggest continued earnings growth, yet our EPS model suggests a decline. And then another factor relates to market sentiment. Generally the time to buy is when it is emotionally the most difficult. And here Again we don’t think we’ve gotten there. But we might be getting close. 

The Fed has moved so fast and so aggressively that we have yet to see what economic damage it may have caused. But in the coming months we expect to see more evidence of some real economic stress and at the same time, the Fed is likely to remain steadfast. That combination should create some significant investor discomfort. 

One other consideration is the importance of being fully invested before the bull market gets started.

Equities-Chart-Oct-5

Our historical work on bull markets suggest that the early cycle typically captures 41% of the total bull market return. Certainly we could wait for more definitive signals like the Fed shifting to easing mode, but our market cycle analysis suggests we would rather be early than late.

For more of our thoughts on U.S. equities please visit our website at Touchstone Funds.com


This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation to buy, sell or hold any security. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

Please consider the investment objectives, risks, charges and expenses of a Fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Funds. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/literature-center or call Touchstone at 800.638.8194. Please read the prospectus and/or summary prospectus carefully before investing.

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crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.

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