With widespread volatility and uncertainty, Wall Street is struggling to find a solid footing this year. The worries include inflationary pressure, a faster-than-expected rates hike, political instability in Washington, trade tensions, technology sector turmoil and rising yields.
Additionally, rounds of weak economic data related to manufacturing, consumer spending, and GDP growth took a toll on the market. Investors have turned more cautious, given the old belief that seasonality plays a huge role in pushing stocks down during the summer months (May to October).
However, consumers were more confident in April with consumer confidence index rebounding to an 18-year high, indicating solid economic growth prospects.
Massive tax cuts and strong corporate earnings are the two major catalysts for stocks. In particular, new tax legislation will lead to an economic surge, boosting job growth in manufacturing and other sectors, increasing inflation and interest rates. Additionally, it would lead to higher earnings, increased buyback activities, and fat dividends.
Meanwhile, Q1 earnings for the S&P 500 index are expected to be the strongest in seven years with growth of 22.6% from the same period last year on 8.4% higher revenues. This is much higher than 13.4% earnings growth recorded in Q4.
Investors seeking to remain invested in the equity world could consider value investing. The strategy includes stocks with strong fundamentals – earnings, dividends, book value and cash flow – that trade below their intrinsic value and are undervalued by the market.
Why Value Investing?
Value stocks often overreact to both positive and negative news, resulting in share price movement that does not reflect the company’s true long-term fundamentals. This creates buying opportunities in such stocks at depressed prices and shows the potential for capital appreciation when the stock finally reflects its true market price.
As a result, value stocks have the potential to deliver higher returns and exhibit lower volatility compared with growth and blend counterparts. In fact, these stocks outperform the growth ones across all asset classes when considered on a long-term investment horizon and are less susceptible to trending markets.
