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Market Drop Was ‘Collateral Damage’ of a Rethink, Credit Suisse's Golub Says

Market Drop Was ‘Collateral Damage’ of a Rethink, Credit Suisse's Golub Says

The stock market’s recent downturn is the result of many companies getting caught up in the repricing of richly valued stocks and the heightened volatility represents an opportunity to make “excess returns,” according to Jonathan Golub at Credit Suisse Securities. 

Firms without earnings, high-P/E and high-sales-growth stocks, among others, were all priced at “crazy high” levels but didn’t deliver better earnings, which made them very expensive. Those types of assets then got repriced amid growing concerns about the Federal Reserve’s hawkish path and inflation -- but the repricing happened so quickly that it caused “near-term collateral damage.”

“Not only did they do poorly, but they pulled other things down with it,” the bank’s chief U.S. equity strategist and head of quantitative research said in a phone interview. Golub includes meme stocks and companies without earnings in that list. 

In other words, “there’s no smoking gun here that says something in terms of the long-term fundamentals has changed,” he said. 

A stock selloff that at one point rivaled any of the last two years was wiped out as dip buyers emerged by Monday’s close, the latest breathtaking reversal in markets rattled by geopolitical tensions and the Federal Reserve’s campaign against inflation. The S&P 500 closed 0.3% higher, while the Nasdaq 100 added 0.5%. 

Market Drop Was ‘Collateral Damage’ of a Rethink, Credit Suisse's Golub Says

“If there was an event -- an announced change in Fed policy or a big problem with corporate profits -- this thing wouldn’t have reversed itself. It would have been a move lower,” Golub said. “What does this tell me? What it tells me is there was nothing fundamental here.”

Golub, who is well-known for his timely market calls, said there are two things that matter to markets longer-term: corporate profits and what’s happening to the discount rate. Earnings are likely to come in 27% higher for the fourth quarter versus the same period a year prior, and 10-year Treasury yields are at historically low levels below 2%. “So this is not a long-term market fundamentals story, this is a volatility story,” he said. 

Golub said the top question he receives from clients is how much further the current downdraft can continue. The strategists said he doesn’t like to make predictions on whether a bottom was formed Monday or could be formed on any specific day or week. 

“Whether buying today is the low-point is not the question -- the question is, if I buy today, am I more likely to get a better return when the VIX is over 30 than when the VIX is back down to 15 or 20 and everything seems calm,” he said. “And the best money to be made is when the VIX is elevated, especially if there’s no particular catalyst that seems to be causing it,” he said. “This is the kind of environment that you make excess returns in.”

©2022 Bloomberg L.P.

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