April showers famously bring May flowers. But this month's market storms may be bringing investors something even prettier -- a buying opportunity for stocks.
The recent volatility on Wall Street is creating concerns about the strength of the economy and leading to questions about just how much longer this bull market can last. But savvy investors should filter out the noise, especially after Thursday's market drop following the lower-than-expected rise in gross domestic product for the first quarter.
"The economy is still strong," said Tom Hulick, CEO of Strategy Asset Managers, a private advisory firm. He thinks the deceleration in growth isn't a cause for alarm, particularly because the job market remains healthy and consumers are still spending at a decent enough clip to support steady earnings growth.
Inflation remains the biggest economic and market worry. The personal-consumption expenditures price index in the first quarter GDP report rose 3.4% on an annualized basis. Hulick believes that investors are now trying to come to grips with the likelihood that inflation (like interest rates) may remain higher for longer. He sees PCE sliding to 3% annualized growth in the near-term, not the 2% level the Fed would like.
But that doesn't mean investors should abandon stocks. In fact, Hulick thinks that investors should still be buying the Magnificent Seven tech stocks, despite worries about the latest earnings report from Meta Platforms. Despite Meta's big plunge Thursday, some tech stocks, most notably chip leaders like Nvidia and AMD, rallied on hopes that Meta's increased capital expenditures budget will mean more revenue for semiconductor companies with exposure to artificial intelligence.
"Mark Zuckerberg is making huge capex plans for the right reasons
He's a visionary. I do think that the spending by Meta is a signal of the importance of AI," Hulick said. His firm owns shares of Meta, Nvidia, and AMD.
Others also argue that Thursday's selloff is a reason to stay the course and not ditch tech leaders.
Alicia Levine, head of investment strategy and equity advisory solutions at BNY Mellon Wealth Management at an event with reporters Thursday, said the strength of the tech sector is one reason why her firm is now forecasting 11% year-over-year earnings growth both this year and in 2025.
She said she is particularly bullish on companies with strong balance sheets that won't have to tap the debt market to raise money through bond sales to fund expansion. That describes pretty much all of the tech leaders.
"If you don't have to borrow to grow, high rates don't have as much impact," Levine said.
But she also noted that the increased market breadth as of late -- the widening of the rally to include financials, health care, industrials and other sectors beyond tech -- is encouraging as well. And it may continue.
Hulick says to look for companies with pricing power and strong profit margins. He points to insurance broker Arthur J. Gallagher, Merck, Intuitive Surgical and Honeywell, which his firm owns, as examples.
Still, Thursday's GDP report is raising some alarm bells. Odds of a recession still seem fairly remote this year, with many fund managers and economists continuing to tout a soft landing -- or no landing -- scenario.
But investors shouldn't completely ignore the warning signs.
"The risk of recession still remains higher than normal given the tight stance of monetary policy," said Mike Reynolds, vice president of investment strategy with Glenmede, in a report titled "Goldilocks Trips & Scrapes Her Knee."
A bond strategist told Barron's that investors need to embrace safer assets as well following the GDP numbers.
"I don't think you can sit here and say there is a zero percent probability of a recession. The higher we are for longer, you are going to start to see cracks in the economy," said Jennifer Karpinski, managing director and senior product specialist at Jennison Associates.
But Karpinski said that increases the odds of a rate cut later this year. That could lead to increased interest in high-quality bonds, namely Treasuries and triple-A rated corporates, particularly financials.
"Defensive, higher-rated issuers can weather a downturn better," she said.
So it looks like the story is similar for stocks and bonds. Now is the time to embrace stability.
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