MSR in the Media | Why February Could Be a Strong Month for Stocks

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After a bearish January, February could be a strong month for high “quality merchandise that is marked-down” to use Warren Buffett’s metaphor.

That would include the shares of companies with a strong market position, which can deliver superior market returns over a long time.

Microsoft and Apple are two such companies that went on sale last month, only to roar back as soon as they delivered profits that beat market expectations. But it could be a weak month for low “quality merchandise,” companies with shaky economic fundamentals that deliver inferior market returns.

What about the Fed’s tapering program and the rising of interest rates? Markets have already discounted this prospect, at least in principle.

“A popular narrative is that equity markets are likely to suffer in the near future, largely due to Fed tightening,” said Robert Johnson, a professor at Heider College of Business at Creighton University. “However, this narrative ignores the fact that the market is forward-looking and is already pricing Fed tightening into equity prices. If the Fed is more hawkish than expectations, it is likely negative for the market. If the Fed is more dovish, it is likely positive for the market.”

Johnson sees valuations being more reasonable this year compared to last year, providing investors a better "margin of error."

“On a relative valuation basis, the broad markets are less expensive than they were a year ago,” he said. “The PE ratios on the S&P 500 large-cap, S&P 400 mid-cap, and S&P 600 small-cap are all considerably lower than they were one year ago. If corporate earnings exceed expectations, we could see the stock market advancing despite the popular narrative that we are due for [or overdue for] a correction.”

James Demmert, managing partner at Main Street Research, sees a “bottom” forming for high-quality stocks.

"We base this view on a few factors - the oversold condition of our volume-based technical indicators, extreme negative sentiment indicators, and the 'washout' of the market's most speculative stocks,” he said. “There were too many stocks trading at excessive price-earnings multiples for too long and that part of the market has been decimated - with many down 35% to 60%.”

Anthony Denier, CEO of trading platform Webull, is bullish on U.S. stocks, which he sees as bets on the future of the economy. Nonetheless, he sees several headwinds ahead like the rising interest rates, the lingering of COVID infections and the standoff between Russia and Ukraine.

“Any of these could spark a significant downturn. And with people and institutions less predictable these days, unexpected things can happen,” Denier said. “That's just what we see right now. A dramatic event we haven't even thought of could also alter the landscape. And, if you believe the January effect, which says the direction of the first month sets the direction for the year, then we're in for a down year.”

Denier noted the futility of forecasting short-term gains or losses in the market.

"But for the long-term, if you believe the country and economy will continue to grow, which I do, then stocks will be higher,” Denier said.