6 Investments to Make Now as a Selloff Creates Buying Opportunities

Global markets were crushed in early August but are beginning to erase their losses.

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• A steep drop caught bulls off guard, but US stocks are already rebounding.
• The S&P 500 tends to rebound strongly after 5% declines.
• Here’s where to invest, according to top strategists at firms like Goldman Sachs and Morgan Stanley.

History is on the side of stocks after a spectacular collapse marked by rare volatility, just like Wall Street.

Leading investment strategists remain cautiously optimistic after the biggest market drop in years. The S&P 500 plunged 3% on Monday, its worst day since September 2022, extending its loss in the first three days of August to 6.1%.

But investors are confidently buying the dip, and if the past repeats itself, they will be rewarded.

“Historical experience shows that investors typically profit when they buy the S&P 500 after a 5% decline,” David Kostin, chief U.S. equity strategist at Goldman Sachs, wrote in an Aug. 5 note.

Goldman Sachs

Goldman Sachs found that the S&P 500 typically follows a 5% decline from its peak with a mid-single-digit gain in the following three months, rising in about 80% of such scenarios since 1980. The index’s track record is more uneven after a 10% correction, though it has still performed well over the next 12 months when the U.S. economy avoids a recession, as it is still expected to do.

It’s also worth noting that while major declines are uncomfortable, they’re not uncommon. According to Truist, in a typical year, the S&P 500 typically experiences a 14% decline from its peak to trough, though it has rebounded an average of 13% from its annual lows in 33 of the past 40 years.

Truist

A massive drop in U.S. stocks should be even less shocking after a furious multi-month rally, Keith Lerner, chief investment officer at Truist, noted recently. The strategist expects U.S. stocks to struggle through this late-summer stretch of seasonal weakness, though he remains confident about their long-term prospects.

“The bull market deserves the benefit of the doubt,” Lerner wrote in an Aug. 5 note. He later added, “It is too early to say that the bottom has been reached. Damage has been done and the repair process will likely take time. However, the risk/reward ratio appears to be gradually improving as the market’s positive surprise bar readjusts lower.”

According to Truist, the S&P 500 has strong technical support.

Truist

Top 6 Places to Invest During This Liquidation Period

While many leading investment firms agree that U.S. stocks have upside potential, there are several different ideas on how to play a potential rally.

Goldman Sachs and Truist recommend defensive stocks in the Communication services And Utilities sectors. Lerner focuses on strong earnings and technical trends in communications services, as well as attractive valuations in utilities, even after a significant rally throughout July.

Kostin, who also argued for consumer stapleshad a slightly different thesis. The chief strategist noted that such economically agnostic groups tend to rise when slower economic growth encourages the Federal Reserve to cut interest rates, as is all but guaranteed next month.

“The beginning of Fed rate-cutting cycles is typically characterized by outperformance of the defensive sector, similar to the rotation that occurred over the past week,” Kostin wrote.

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, agrees. His cautious approach focuses on defensive stocks, as well as venture capital stocks. large caps.

Companies that can withstand any economic environment have remained strong relative to cyclicals as the labor market loses steam, as Wilson wrote in an Aug. 5 note that “the market is increasingly sensitive to slowing growth.”

Cyclical stocks have declined relative to defensive stocks, which appear to be gaining ground.

Morgan Stanley

And while conventional wisdom says that lower rates will mostly help economically sensitive companies and small caps, Wilson’s research led him to the opposite conclusion.

“While this may seem like a recipe for cyclical and small-cap outperformance, history shows that market leadership in lower rates is largely the opposite, with defensives and large-caps showing relative strength,” Wilson wrote. “This is because small-cap and lower-quality cyclicals tend to be economically sensitive and reliant on pricing power.”

Weakening inflation means companies can’t pass on higher costs to consumers, and small caps could be hit hardest because they don’t have the same scale as their larger rivals. If Wilson is right, the long-awaited small cap rebound could be short-lived.

“While we don’t necessarily expect small caps to underperform large caps as much as they have in recent years, we still see relative downside for the Russell 2000 ahead given the deteriorating consumer and labor environment discussed above and the fact that small cap stocks are generally much more sensitive to the economy,” Wilson wrote.

Morgan Stanley

Meanwhile, the best minds at UBS Global Wealth Management are going on the offensive, albeit cautiously, looking high quality growthincluding The main actions of the artificial intelligence sectorwho have been particularly affected recently after dominating for most of the year.

“We maintain our positive view on the AI ​​growth story and believe the recent equity price correction provides a good opportunity to add exposure to AI’s key beneficiaries in semiconductors, software and the internet at more reasonable valuations,” Solita Marcelli, UBS GWM’s chief investment officer for the Americas, wrote on August 5.