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Don't Worry About a Recession: Zacks OCT Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full Oct Market Strategy report To access the full PDF, click here.

 

Introducing History to the Worriers

To early October 2022 has handed in a hefty U.S. stock market correction.

2023 is the forward look, now, in terms of stock market fundamentals, like earnings and revenue growth.

Maybe even 2024, in part.

Were the following 2022 share pullbacks anticipated recession declines?

  • DJIA (YTD -16.7% on Oct. 6th)
  • S&P500 (YTD -20.6%), and
  • Nasdaq (YTD -29.8%)

 

Perhaps.

However, for the worriers out there…

Next, I quote what “See It Market” put down, after its review of the last 80 years —

“There have been eleven recessions since the late 1940s, coincidentally with an average duration of eleven months.”

  • “Interestingly, the average price return of the S&P500 during these recessions was around 0%.”
  • “Now much can be hidden in an average. The last recession (aka global financial crisis) had markets down -37% once the recession started until it ended.”

“But during others, the market actually rose. In fact, in six of the eleven recessions the S&P500 rose.”

“In many cases most of the pain is felt before the recession actually begins.”

In light of that carefully worded comment, respecting the relevant history and facts, that doesn’t make 2023 sound scary, for savvy stock market traders and investors.

Also, with that precise language and careful review of pertinent facts, in mind, consider the latest Zacks October Market Strategy report “fair value” set-up.

Top-Down S&P500 Year-end 2022 Targets

To Oct. 4th, the S&P500 YTD loss stood at -22.8%. To Sept. 1st, the loss was -17.8%. To Aug.1st, the YTD loss was -13.6%. July 1st, 2022, the YTD loss was -20.7%. To June 1st, it was -13.3%.

All three prior years recorded well above average annual S&P500 returns:

  • In 2021, the annual S&P500 share gain was +26.9%
  • In 2020, the gain was +18.4%
  • In 2019, the gain was +28.9%
     

The historical expected annual return (using data from 1930 to 2021)? This is +7.9%. In short, blunting prospects for 2022, big share gains got booked across 3 prior years.

Next, a table shows Zacks’ updated views on 2022, 2023, and 2024 S&P500 earnings and “fair value” index calculations.

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

Label any excess over Zacks “Fair Value,” compared to the current S&P500 index price, as the “Fed or G10 Money Printing” effect, and an excess COVID savings effect.

After the selloff, large-cap U.S. index valuations are respectful of recent history, now.

Zacks October Sector/Industry/Company Telescope

It will be interesting to see what changes, after Q3 S&P500 EPS reports come out.

Entering October, the Zacks Industry Ranks offer three Very Attractive sectors: Energy again. New strength was seen in both Financials and Consumer Staples.

Insurance looks great, and Banks & Thrifts prospects rise with interest rates. Beverages and Tobacco use are strong, as the Leisure Industries remain attractive.

Health Care and Industrials are the Market Weights this month.

Consumer Discretionary fell to Unattractive. But Leisure Services, Apparel and Nonfood Retail continue to hold up.

Materials rose to become an Unattractive industry. Chemicals and Building Products are solid.

Info Tech fell to Unattractive. The critical Semi industry looks terrible.

Utilities fell to Very Unattractive. Both Water Supply and Telephone are poor now.

(1) Energy stays the top sector, remaining firmly at Very Attractive. Tops are Oil Misc. industries, Oil & Gas Exploration and Production, and the big Integrated plays.

Top Zacks #1 Rank (STRONG BUY) Stock: The Williams Companies (WMB - Free Report)

(2) Financials moved up to Very Attractive from Attractive. Insurance is clearly the best now. Banks & Thrifts got an upgrade. 2023 recession worry remains relevant to this space.

Top Zacks #1 Rank (STRONG BUY) Stock: Berkshire Hathaway (BRK.B - Free Report)

(3) Consumer Staples rose to Very Attractive from Market Weight. Beverages and Tobacco look the best now. Agri-business is attractive again.

Top Zacks #1 Rank (STRONG BUY) Stock: Coca Cola Femsa (KOF - Free Report)

(4) Industrials fell to Market Weight from Attractive. Metal Fabricating is tops. Pollution control is solid. Transport fell to Market Weight. Business Services is also Market Weight.

(5) Health Care stays a Market Weight. Medical Care and Drugs look relatively better.

(6) Communications Services stays at Market Weight. Telco Equipment and Telco Services look about the same now. Market Weight for both.

(7) Consumer Discretionary fell to Unattractive from Market Weight. Leisure Services looks the best. Apparel and Nonfood Retail are solid again. Publishing is terrible.

(8) Info Tech fell to Unattractive from Market Weight. Electronics looks OK. Computer Software-Services is at market. Semis look terrible.

(9) Materials rose to Unattractive from Very Unattractive. Chemicals and Building Products look the best, at market weight.

(10) Utilities fell to Very Unattractive from Market Weight. Utilities-Water Supply and Utility-Telephone look poor.

My October 2022 Conclusion

One of the hardest things for always-worried stock market investors to grasp?

How quickly stock markets move, and in a corollary statement, how fast these same stock markets put critical fundamental matters in their rear-view mirror.

If you are worried about a 2023 U.S. recession in output, employment and earnings, that is likely already factored into stock prices.

Now!

What you should worry about?

Likely something else, entirely.

Or just get bullish, and take advantage of these cheap valuations.

These are share markets where savvy investors can make a lot of money.

Enjoy the rest of my Zacks OCT Market Strategy report.

Warm Regards,

John Blank
Zacks Chief Equity Strategist and Economist


In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


Williams Companies, Inc. The (WMB) - free report >>

Berkshire Hathaway Inc. (BRK.B) - free report >>

Coca Cola Femsa S.A.B. de C.V. (KOF) - free report >>

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