- Stocks have sold off too much in the near term, according to Truist co-CIO Keith Lerner.
- Lerner accurately called the April small-cap selloff, the mid-June bottom, and the mid-August dip.
- Here are five charts that provide reasons for optimism for investors right now.
The late-summer stock market selloff has gone too far, according to Keith Lerner, the co-CIO and chief market strategist at Truist Bank — though caution is still warranted right now.
"On a short-term basis, several indicators suggest the selling is getting overdone," Lerner wrote in a September 1 note. "Of course, oversold markets can become more oversold. Still, after advocating for trimming equities on strength, with this sharp correction, we would be less apt to do so — at least over the short term."
Lerner appears to have a knack for making timely market calls. The strategy chief downgraded small caps in early April before they fell 20%, accurately timed the market bottom in mid-June, and warned about key risks to US stocks in early August, right before the S&P 500 plunged.
While Lerner's most recent prediction may cause some bulls to rejoice, it's worth noting that he expects stocks to remain "in choppy waters" in the medium term, while adding near the end of his note that "markets do not typically move in a straight line."
That last point is impossible to argue with. Stocks seemed destined to log a fifth straight day in the red on Thursday before the S&P 500 erased a 1.2% loss and mounted a 1.6% intraday comeback to finish the day up. That strength carried into Friday after a solid August jobs report, though the index ended the week down regardless.
The bounceback followed a week of heavy pressure on stocks after the Federal Reserve warned markets that it will take "some pain" to bring down rampant inflation. Investors needed time to process how even higher interest rates would impact stocks and the economy, which some fear will enter a recession.
"The market went from pricing in a recession, down almost 24% at the June low, to fully embracing a soft landing and a Fed pivot on the subsequent 17% rebound," Lerner wrote. "This left little room for error in a time of unusually wide outcomes."
Lerner's near-term S&P 500 target is 4,200 to 4,300, which represents a modest upside of 5% to 7.5%. However, now is not the time for investors to be heroes — stick with defensive quality, Lerner advised.
"Macro challenges remain and are set to persist," Lerner wrote. "This is not the time, in our view, to be aggressive on the buy side. Inflation remains elevated, and we are seeing the most aggressive global central bank tightening cycle in decades and rising recession risks."
However, traders shouldn't be afraid to step in and buy the dip either, in Lerner's view.
Below are five charts that were either included or referenced in Lerner's note that show why the worst of the stock market selloff may be over — for now.
1. Such sharp declines are uncommon and don’t usually last
"Over the past 12 days, the S&P 500 has declined 9%, which is the most extreme since the mid-June lows," Lerner wrote.
2. Stocks don’t stay so oversold for very long
"Similarly, with the sharp pullback from the highs, the percentage of stocks in the S&P 500 that are oversold, or stretched to the downside on a short-term basis, has moved to an extreme of about 80%," Lerner wrote. "This is a similar reading to what was seen near the June lows."
3. Downbeat spirits are a bullish contrarian indicator
"At the same time, investor positioning and sentiment remain somewhat depressed, which is a positive from a contrarian standpoint," Lerner wrote. "For example, speculators in the futures markets — such as hedge funds, individuals, and large financial institutions — are still betting firmly against the market at the most extreme levels since early on during the pandemic."
4. Investors are getting too bearish, too quickly
"Likewise, the latest survey from the American Association of Individual Investors released this morning shows the percentage of bearish investors has jumped to 50% from 37% just a few weeks ago," Lerner wrote.
5. Valuations have already come down substantially
"From a fundamental perspective, the S&P 500's forward P/E has declined from 18.2x at the recent high to a more reasonable, though far from compelling, P/E of 16.4x," Lerner wrote.
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