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Many stocks have already corrected so investors don't need to wait, according to Morgan Stanley's Lisa Shalett.
- The CIO stated that 85-90% of stocks have corrected, with many about 10 or 20% from 52-week highs.
- She noted that Big Tech stocks still need to correct 10-15%.
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The stock market has got off to a shaky start in 2022, but most shares have already corrected, so investors don't need to wait for further losses to buy into any dips, according to Morgan Stanley Wealth Management chief investment officer Lisa Shalett.
"85-90% of stocks in the market have corrected from 52-week highs,and many have corrected as much as 10% or 20%," she said in a Bloomberg Surveillance interview on January 13.
Shalett said Big Tech stocks still need to correct 10-15% to reflect the expectations for tighter Federal Reserve policy. Analysts widely expect three interest rate hikes from the Federal Reserve in 2022, starting as early as March.
She said these stocks have not corrected yet, partly because the broader market "has been extraordinarily skeptical of the Fed," over how quickly the central bank will raise rates and wind down its massive balance sheet.
"It is a question of actually seeing the Fed follow through," Shalett told Bloomberg on the timing of expected rate hikes.
"Certainly we now planted the seeds that not only are rate hikes on the table as early as March, but the Fed minutes really planted the seed that perhaps we will see the balance-sheet runoff," she said.
Markets were rattled last week by the minutes of the Fed's most recent policy meeting, at which members discussed not just winding down monthly asset purchases, but selling off some of those holdings to withdraw liquidity from the financial system.
Growth stocks - those whose valuations are often derived from their expected future potential - have been particularly hard hit, with tech bearing much of the brunt of the sell-off, as investors turn away from sectors that typically underperform when interest rates go up and inflation takes off.
"Once there's more clarity on that, that will be the last down leg in the market among those names," she added. "Balance sheet runoff really contributes to actual tightening and really ultimately translates to the equivalent to further rate hikes."
She noted that double-digit growth in tech companies has rarely been sustained without being disrupted by competition.
"It's not a question of whether these are great companies, it's a question of whether they're great stocks and what's priced in and how realistic is it," she said.
Shalett said investors would do well to pivot towards companies that can still perform in an environment of rising interest rates.
"This is an opportunistic stock-picker's market," she said, adding that "resilient" stocks should be chosen which can beat profit forecasts, raise dividends, and raise buybacks.
"Cash is an opportunistic asset right here," she said.
The benchmark US indexes have started the year on the back-foot. The S&P 500 has fallen 2.59%, Nasdaq has dropped 5.49%, and the Dow Jones Industrial Average is down 1.32% after logging record gains in 2021.
