Is A Relief Rally On The Way For Stocks?

Stocks have been hit by inflation, valuation, and market sentiment over the past several months — is there a buying opportunity now?

Feb. 25, 2022

To offer some solace in harsh times, for the newer and younger investors out there — this could actually present an opportunity. If we take a step back, stocks are being more fairly valued than they have been in years, especially in the U.S. markets.

What’s a relief rally?

A relief rally is the term used when stocks quickly rebound following an overreaction to overly negative market events. According to Callie Cox, an investment analyst from eToro, “since 1990, when fear and uncertainty has risen this high, the S&P 500 has averaged 18% returns in the following 12 months.”

Earnings are key, guidance is key, and profitability is important right now. Solid business fundamentals are a must, as investors rotate out of speculative asset classes. But there are always opportunities. 

Are stocks cheap or expensive right now?

Let’s look at a metric that has long been a determinant investors use to value stocks, the price-to-earnings (P/E) ratio. Over the course of the last century, the P/E ratio for the S&P 500 has had a mean value of roughly 16. Although we’re still considerably above that level now, it currently stands at about 24 but has been slashed considerably from February 2021 peaks in the mid-30s.

Many value investors wouldn’t give a second glance to a company with a P/E a dash over 20, but now, there are several high-flying names shuffling around that range or slightly higher. Not just mature businesses either, but the well-known names that are still growing — players like Shopify, Facebook, Paypal, TakeTwo, Google, and Amazon, for example.

Is now a bad time to invest?

Understandably, many investors are stand-offish when it comes to loading any more money into the market — but there’s a solution that can help long-term investors. Dollar-cost averaging and buying strong companies — those with a competitive advantage, an innovative roadmap, stable or growing earnings, and with the cash available to navigate short-term headwinds.

If your outlook is ten years or longer, this downward cycle will likely be a blip in the grand scheme of things, and you’ll be thanking yourself for edging in piece-by-piece when you’re looking to buy or upgrade a home, or achieve early retirement in the coming years.

So in times like these, as repetitive as it is, it’s important to remember Warren Buffett’s popular age-old quotes:

“Be fearful when others are greedy, and greedy when others are fearful”

“Time in the market beats timing the market”

The same old mantras, I know. But, they’re cemented in long-term investors’ heads for good reason. Buffett was certainly on to something, and maybe I’ll be wrong on this, but I wouldn’t be surprised if we see Berkshire Hathaway loosen its purse strings on the $150 billion it has had sitting in cash for the last several years over the coming months either.