2022 has been a tough year for global stock markets. While the FTSE 100 has held up quite well year to date, most other major indexes are down double-digits. The S&P 500, for example, fell 20.6% in the first half of the year (its worst first-half performance since 1970).
The good news is that we may now be close to the bottom. Right now, many stocks are down significantly, and a lot look oversold. Here’s a look at why I think things will get better and how I’m positioning my portfolio for a potential stock market recovery.
Economic uncertainty
There is still a lot of economic uncertainty at the moment. We have inflation at its highest level in around 40 years and central banks raising interest rates rapidly. We also have the war between Russia and Ukraine and a slowdown in China. On top of this, there’s talk of a recession in 2022 or 2023. Overall, the economic backdrop doesn’t look great.
Share prices have already tanked
The thing is though, most of this now appears to be priced into stocks. Right now, many well-known blue-chip stocks are down 20% or more year to date. Meanwhile, many growth stocks are down 50% or more. Take PayPal, for example (which I own myself). It’s down around 60% for the year (chart below).
I’d argue that valuations also reflect the economic uncertainty. At present, plenty of companies are trading at very low valuations. Legal & General is a good example here. It has a price-to-earnings (P/E) ratio of less than eight.
Of course, we could see another leg down from here if economic conditions get worse. Some experts believe the S&P 500 will fall to around 3,500. However, given the big drop in H1, that’s not so scary. The market has done a lot of the hard work (down) already. That’s why I think we could be close to the bottom right now.
Stock market recovery
I’ll point out that I don’t expect a ‘V-shaped’ recovery (like we saw in 2020) this time around. Instead, I think a recovery is more likely to be ‘U-shaped’ (slower and more drawn out) due to the high level of uncertainty.
However, if we get some good news, such as a drop in inflation, an end to the Russia-Ukraine crisis, or an announcement from the US Federal Reserve that it’s finished hiking rates, I do think share prices could move sharply higher.
How I’m positioning for a rebound
In preparation for an eventual rebound, I’m doing several things right now.
Firstly, I’m adding to my favourite stocks. In recent weeks, I’ve bought more shares in companies such as Microsoft, Visa, and Nike (these are all US-listed).
Secondly, I’m buying stocks in industries that look well placed to benefit from a stock market recovery. Healthcare and semiconductors are examples of such industries. Smith & Nephew and Nvidia are some names I like here.
Finally, I’m also buying or adding to beaten-up stocks that could have considerable upside potential in a recovery. An example here is GB Group, a UK company that specialises in identity management. It has experienced a big fall in 2022 and now looks cheap. I think it could do well if the stock market has a rebound.