The mood in the stock market by the end of last week was the type of stuff that contrarian investors dream about.
The S&P 500 Index slid almost 5% from its last record in January as the war in Iran shows no signs of ending soon, keeping oil prices alarmingly high. While some Wall Street strategists are remaining cautiously optimistic, the Investors Intelligence survey of market analysts is flashing its most bearish reading since November.
“From a contrarian perspective, seeing sentiment heading south just increases the likelihood that we’ll get a good buying opportunity at some point ahead,” Ed Yardeni, the veteran market analyst and president of Yardeni Research, said in an interview. “It’s worked very well for me in the past,” he said, before adding a big caveat: “It may not work now.”
The problem, as Yardeni sees it, is that in past instances when investor sentiment took a dive, the pessimism was usually associated with a sudden, surprise deterioration in economic fundamentals that in turn triggered stimulative responses from monetary and fiscal policymakers.
This time around, policymakers may be impotent to provide quick remedies to the economic damage being wrought by the war as it chokes off much of the flow of oil and other shipments through the Strait of Hormuz.
“We’re talking about the fog of war, we’re not talking about something that US policymakers can respond to and turn around,” Yardeni said. “Wars are two-sided affairs, and even if the president said, ‘You know what? We won. The Iranians don’t seem to realize it, but we’re leaving.’ Well, the Israelis might not realize it either, and the Iranians may continue to create problems in the Straight of Hormuz.”
It all leaves Yardeni hesitant to recommend buying the dip, and instead adds him to the chorus of Wall Street pros who have turned risk averse, at least in the near term, as oil trades near $100.
Appetite for US stocks showed further signs of subsiding last week as escalating tensions in the Middle East stirred inflation angst and pushed rates higher. The Magnificent Seven group of technology megacap companies entered a correction on Friday and the S&P 500 closed out the week at 6,632.19, or just 0.4% above its 200-day moving average — a point many hoped would mark a near-term bottom. Futures on the index were up about 0.7% in early trading Monday as oil prices reversed an earlier advance amid hopes that more tankers could traverse the Strait of Hormuz, with talks ongoing to ensure the waterway’s security.
Bullish strategists from Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. point to support from earnings growth and valuations that, while still elevated, are less stretched than before. Elsewhere, equity strategists in Asia were more cautious on the potential impact of the conflict
At the outset of the conflict, Morgan Stanley said that oil holding above $100 would lead to a correction in stocks. Last week, JPMorgan Chase & Co.’s trading desk turned tactically bearish and also warned of a correction. And Evercore ISI said crude prices between $93 and $97 would signal a drop in equities.
Bank of America strategist Michael Hartnett even drew comparisons to late 2007 and early 2008, the early days of the global financial crisis that saw the S&P 500 plunge 57%, as the spike in oil prices and growing concerns around private credit cause flashbacks.
Still, the contrarian instinct to go against a groundswell of pessimism is a hard one to shake for many traders. So Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group, has an options play to recommend for those with the gumption to bet on a market rebound should a ceasefire be announced in the Middle East: Sell puts insuring against a 10% drop in stocks and use the proceeds to buy calls expiring in May that pay out if the S&P 500 rises 5%.
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