Have ASX shares bottomed yet?

A baby reaches into the bottom drawer of a chest of drawers.A baby reaches into the bottom drawer of a chest of drawers.

After a turbulent 2022 with wars, inflation and interest rate rises, it might surprise you that the S&P/ASX 200 Index (ASX: XJO) has actually risen 5% since 20 June.

So some investors are asking now whether we have passed a trough? Are there brighter times from here onwards?

After all, everything outside of the energy sector has been savagely sold off. Surely it gets to a point where selling is exhausted?

Ophir Asset Management co-founders Steven Ng and Andrew Mitchell set out to answer this question in their latest letter to investors.

More declines could come, but for how long?

The first point to note, according to Ng and Mitchell, is that no one knows for sure whether the market has bottomed.

But their hunch at the moment is “not yet”.

“Why? Because we have not yet seen the earnings downgrades caused by central banks, most notably the [US] Fed, seeking to suppress demand through rapid rate hikes,” read the letter.

“It would be highly unusual if earnings growth were not materially revised down because of the Fed likely compressing most rate hikes for this cycle into 2022.”

They cited Goldman Sachs research showing that historically stock prices started their recovery about six to nine months before earnings pick up.

“The market is forward looking and attempts to price in the coming earnings fall. This is essentially what we have seen so far in 2022,” said Ng and Mitchell.

“But what happens next? This is where the great mystery lies.”

Hard vs soft landing

From here there are two possible scenarios, according to the Ophir team.

Steep rises in interest rates could bring along a recession, which means significant falls in company earnings. This would mean stock prices have further falls coming.

The alternative is that central banks miraculously achieve a “soft landing”, which would see just “minor revisions” downwards in earnings. That would bring a stock price recovery reasonably soon.

“The reality is no one knows which it will be. Not the Fed, not your favourite economist and certainly not the press,” read the Ophir letter.

“Take Goldman Sachs themselves. Early in July, its non-recessionary year-end forecast for the S&P 500 Index (SP: .INX) index is 4,300 (+14%), while its recessionary scenario forecast would see the index fall to 3,150 (-17%). Such a wide range as to be almost useless to anyone!”

The trick is to remain vigilant of opportunities and to practise dollar-cost averaging.

Veye director Varun Ratra said this week to “never give up in bear markets”.

“Biggest gains are made in the early stages of the new uptrend,” he said. 

“The smartest opportunities appear in the young bull markets.”

The post Have ASX shares bottomed yet? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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