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Purchasing Group: Wall Street has taken a hit, and it's not necessarily bad - Walla! Of money

2022-05-11T13:00:21.465Z


The wave of declines that swept Wall Street may have moderated, but that does not mean it is behind us. What to fear, why does it not yet mean that the market is bearish and where are the buying opportunities located?


Purchasing Group: Wall Street has taken a hit, which is not necessarily a bad thing

The wave of declines that swept Wall Street may have moderated, but that does not mean it is behind us.

What to fear, why does it not yet mean that the market is bearish and where are the buying opportunities located?

We turned to people who know how to explain

David Rosenthal

11/05/2022

Wednesday, May 11, 2022, 2:31 p.m.

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A wave of declines has swept Wall Street over the past week.

Despite the recovery recorded yesterday, sentiment is negative, stocks are falling and investors' fears are great.

Why does this happen and how will it affect us, if at all?



"The sharp declines on Wall Street, which we are witnessing today, are in fact a dramatic and unusual encounter between a number of different parameters," explains Shmulik Karpf, foreign securities research analyst at Bank Leumi's Investment Advisory Division. "The first parameter is of course high inflation. It is not something that happened overnight and surprisingly, it was not the crisis in Eastern Europe that caused it.

In this sense, it is important to note that the relationship between inflation and the stock market is not necessarily the opposite.

The economic environment can certainly be characterized by a rise in prices, along with price increases in the stock markets.



"The second parameter is raising interest rates. It should be noted that raising interest rates did not begin as a solution to inflation, but as a need to balance the true value of money, after prevailing at such low levels for such a long time. The Fed waited a long time to raise interest rates. In fact, this is actually a return to normalcy, although we have long been accustomed to the interest rate remaining zero and unchanged. Gates.

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Red, but how scary? (Photo: GettyImages, Michael M. Santiago)

Shmulik Karpaf (Photo: Oren Dai)

And yes, there is also China.

"The third parameter is the slowdown in business activity in the second largest economy in the world," Karpf continues. In Eastern Europe, a very problematic and unusual combination has been created here that makes the situation even more difficult.



"The fourth parameter is a very high level of pricing, including the loss-making technology stocks.

In the last two years we have seen many companies that have a negative cash flow and whose shares have been trading at very high double-digit multipliers on revenue, with no net profit.

"This is a phenomenon that can be likened to a race car traveling in Ayalon - every little mistake in the steering will lead to an accident."



Nonetheless, Karpaf highlights two salient points that may moderate your desire and need to escape the stock market: "We are not yet in a bear market (a market characterized by sharp declines over time) neither in the US S&P 500 nor in the leading domestic markets.

However, it is certainly possible to take advantage of the current point in time in order to examine whether the level of risk in the portfolio matches the needs of the investor.

In addition, history teaches us that a bull market (characterized by long-term increases) usually occurs for a relatively long period of two to three years, while a bear market occurs in relatively short periods of up to a year.

Therefore, a strategy of realizing the entire portfolio is not the right decision over time, because at the end of each sharp decline there is a sharp increase, and it is often very difficult to grasp the exact point in time to re-enter the market at the moment of increase. "

Nasdaq recorded significant gains yesterday, after weeks of fairly sharp declines. According to Shahar Carmi, the technology analyst at Psagot Investment House, it does not appear that this is a calming siren and the negative trend on Wall Street is still here. " .

The story can be divided into two parts - a realistic part and a financial part.



"In the real part, it can be noted that a number of major technological revolutions have taken place before our eyes in recent years and are causing great excitement among investors. (Distance work, distance learning, distance medicine and more), the automation revolution with its autonomous composition, as well as a wide range of robotics in various fields of activity, and the replacement of expensive manpower in algorithmics and advanced data processing. And the companies active in these fields have begun to show impressive growth, and it seems that even after the epidemic subsides, these trends will not disappear, but at most they will moderate slightly.



"On the financial side, we have witnessed a lengthy process that began as early as 2009, of keeping interest rates very low, and in addition quantitative easing that has been reflected in injecting money into the market, raising the price of bonds and lowering financing costs for businesses and consumers. Inflation was still low. However, towards the end of 2021, global inflation began to rise. This required the central banks, led by the US Fed, to completely change its policy. A rate that has not been seen since 1982. Lowering inflation requires raising interest rates, ending the bond buying process and a very hawkish tone, indicating an intention to continue raising interest rates as much as needed, even at the cost of hurting the economy in the short term. To recession. "

A hawkish tone.

Fed President Jerome Powell (Photo: GettyImages, Brendan Smialowski)

Shahar Carmi (Photo: Moshik Brin)

Carmi points out that as long as money was cheap, and long-term bonds yielded extremely low, and even negative, returns in some Western countries, companies enjoyed very cheap financing for their businesses. Their prices to high levels relative to their historical levels.



Now we will attach the two events - the real and the financial.

"Companies that offered very high growth (which was strengthened by the Corona, as mentioned above) ignited the imagination of investors and led them to buy the shares of fast-growing companies at very high values," Carmi explains. These will enjoy tremendous revenue and impressive profits.

Because the alternative was a very low yield on bonds, the price of those shares enjoyed double. Sales multipliers of 10, 20 and even 30 have become a common sight among companies that have managed to show growth of over 30% in annual revenue, especially when revenue returns (e.g. from subscriptions). "Inflation is picking up, and it has become clear that central banks will have to change direction, with most stocks declining in price.

The melancholy of technology

The most interesting sector for investors is, of course, technology stocks.

"Meanwhile, the quarter's technology company reports have been mostly positive, particularly in the chip space, which enjoys a relatively long business cycle relative to historical ones," says Carmi.

But these results are akin to looking in the rearview mirror.

There are already buds for weakness in Fatah, when the percentage of companies that beat the results in the revenue line on Nasdaq fell in the last reporting season to about 73%, compared to about 82% in the previous season and about 84% in the same period last year. "Amazon and Netflix. It is likely that as the interest rate hike continues, we will see technology companies present less good reports, especially those that are biased towards sales to the private consumer.



For now, Carmi believes, the negative trend will continue, even if aggressive upward corrections occur from time to time: "Of course, this will be a positive signal towards the end of the declines. Of course, the end of the fighting in Ukraine will be very positive for the market, as it generates inflation (the increase in wheat, gas and oil prices, as well as the shutdown of factories in the country)."

Skydiving.

Netflix (Photo: ShutterStock)

What about local technology?

"Local technology stocks are global companies and are affected by the same trends," says Carmi. Secondly, profitable companies are also suffering from adjusting multipliers and concerns about poorer performance in the near future. You can finally invest in excellent companies at reasonable prices, so it's true that the trend is now negative, but those who invest in excellent companies in the long run will enjoy it. (FVRR), Thyme (KRNT), Jiprog (FROG),

And even the veteran NICE, which until recently traded at prices that were hard to justify.

"Even if not all of them are excellent, they are good companies, which we believe will give those who invest in them today a handsome return in the long run."

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  • Netflix

Source: walla

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