Investing isn't easy at the best times, but it's fair to argue that we are approaching a particularly tricky period. It makes sense to be prepared. In that line of thought, here's how investors might look to invest over the next six months.
Prepare for individual stock volatility
Uncertain economic conditions often cause companies to miss earnings estimates, and it's no secret that the market doesn't like being disappointed on the issue. Unfortunately, we are in an environment where there's likely to be a fair amount of variance around earnings numbers and what management and investors expect. However, we are also in an environment where interest rates are set to decline next year.
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A bullish outlook latches on to the latter and sees interest rates falling next year, leading to a brighter outlook for consumer spending in the future. The brakes come off the economy, and it makes sense to start buying cyclical companies. In this scenario, the market will begin to price a lower-rate environment, and the stock market should do well.
An alternative and bearish view sees sequential economic weakness in the first half, leading to many companies lowering outlooks and reporting weaker conditions as customers react to negative pressure on their end markets.
Which is the right approach?
Both are. Economic forecasters such as The Conference Board are predicting two consecutive quarters of negative sequential real GDP growth in the first and second quarters of 2024, leading to lower interest rates in the third quarter and a pick-up in sequential growth in the third and fourth quarters.
Expect the first half of 2024 to contain companies reporting weaker near-term conditions and missing guidance. In fact, we are already seeing these dynamics in play.
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Earnings misses
For example, FedEx recently "shocked" the market by lowering its revenue growth expectations for its full-year fiscal 2024 (finishing at the end of May) to a low single-digit decline from a prior assumption of flat revenue growth in 2023. FedEx shares tumbled more than 12% on the news.
Tesla's (TSLA -1.11%) stock declined after its earnings report in mid-October as its revenue growth slowed due to price cuts. These cuts were in response to higher interest rates pushing up monthly payments on cars bought on credit.
ON Semiconductor (ON 2.53%), a company increasingly focusing on intelligent power and sensing solutions in the industrial and automotive industries, walked back expectations for $1 billion in revenue from its silicon carbide solutions in 2023. It came down to "a single automotive OEM's recent reduction in demand," according to CEO Hassane El-Khoury.
In Tesla's case, higher rates are pressuring consumer discretionary spending conditions. The same effect is indirectly hitting ON Semiconductor, as just one major automotive customer is cutting back on investment. The semiconductor company's stock declined an eye-watering 32% in October.
It's a similar story at machine vision company Cognex (CGNX 2.06%), whose order book has dried up this year due to weakness in spending by its consumer electronics, logistics (e-commerce warehousing), and automotive customers. Here again, Cognex stock has struggled in the aftermath of disappointing earnings.
The darkest hour comes before the dawn
But here's the thing. Even as Tesla, ON Semiconductor, and Cognex have disappointed the market due to cyclical economic weakness, all three stocks have come roaring back.
Investors have taken the view that the reasons for these companies' disappointing updates/earnings reports come down to cyclical factors that will reverse. As such, the slumps in the share prices could be good entry points into long-term growth stories.
After all, lower rates mean Tesla can raise prices (as monthly loan repayments would fall). Cognex's end markets would receive a boost with growth in real disposable income, and ON Semiconductor will also see its customers loosen their purse strings with lower rates.
Buy on the dip in 2024
This approach, combined with forecasters' outlook for the economy in 2024, means it makes sense to keep some financial firepower in reserve and look to pick up stock on potential dips caused by short-term negative news. That appears to be the best approach in the first half of 2024.
