Despite weak start to year, Wall Street stocks have room to rebound

Wall Street has started the new year where it ended 2015, with a host of factors unnerving investors. U.S. stocks have fallen 4.2 percent in the last five sessions, and there’s little reason for optimism amidst the international threats and corporate weakness that have prompted accelerated selling.

It may get worse before it improves: shares still are pricey and investors who say they can’t calibrate geopolitical woes such as a weakening China and a North Korean hydrogen bomb test are sticking to the sidelines for now.

But the sluggish start doesn’t necessarily point to a year of losses. January often is a bad month for stocks and all of the recent selling has beaten down some shares low enough to interest selective investors.

The average stock in the S&P 500 is off almost 19 percent from its 52-week high, resulting in a bear market for most stocks but also suggesting there are a wide swath of stocks that have been beaten down and may be able to provide value, said Jeff Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

“There are very legitimate reasons for concerns. You could argue the market response has been very rational. At the same time, how much have things really changed? I would argue not much,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Mass.

“I could make a case that we could may see a number of positive surprises here in the U.S.”, he said.

U.S. stocks still appear to be expensive, with the forward price earnings ratio of the S&P 500 at 16.4, below the 17.4 reached in March but still at highs not seen since 2004.

But those valuations could be exaggerated by a smaller group of stocks that have driven the S&P over the last year and are priced richly. Amazon (AMZN.O), part of the so-called “FANG” group of stocks that helped keep the S&P 500 near steady in 2015, has a PE for the next 12 months of 114.3, for example. Netflix (NFLX.O) is even higher, showing a ratio of 368.5 for the next 12 months.

But that doesn’t mean investors should blindly buy any stocks that have lost ground, according to Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, Texas.

“The problem with things that are cheap is that they can always get cheaper,” Frederick said.

The technical picture for stocks has also deteriorated, as losses on Wednesday pushed the S&P 500 below a key support level around the 1,990 mark which could result in a full retest of its August lows near 1,870, according to Saut. Those August lows were also triggered by worries over China.

“I don’t know how to handicap the Saudi Arabia and Iran war, an H-bomb in Korea, so I am not doing anything right here,” said Saut.

The declines have also raised concerns that a weak January could result in a down year for stocks, but there is scant evidence for that idea. The current bull market, now nearing its seventh year, has shown resilience for several years running, and historic data shows that a bad start does not a bad year portend. And January is often grim: in one third of the years since 1945, shares in the S&P 500.SPX hit their yearly lows in the first month of the year, said Sam Stovall of S&P Capital IQ.

With all the headwinds potentially facing stocks this year, it’s not time to give up on them, but to be more selective, said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh. She is looking at names in the retail, technology and materials sectors, looking for companies that are gaining market share.

“My sunshine is out there,” she said.

Source: Reuters