Getting seasick from the rising volatility in the equity markets these days? Tobias Levkovich, chief U.S. equity strategist at Citigroup, believes the ups and downs will persist. But the good news is that these wild swings will provide plenty of buying opportunities for long-term investors.
“While various reasons can be cited for any day’s trading action, the underlying drivers of volatility may keep investors in a state of dizziness with markets trending higher,” he said in a note to clients.
He is, of course, referring to the fact that the Dow Jones industrial average shot up 135 points Friday two weeks ago, fell 77 points on Tuesday, rose 138 points on Wednesday and plummeted 362 points on Thursday — leaving investors confused and anxious.
Conditions for a sustained period of rising stock prices will be challenging in the near term, Mr. Levkovich argued, pointing to the steepness of the yield curve, the unattractive equity risk premium and growth in private sector credit. However, small cap stocks are likely to bear the brunt of most pullbacks in the market, while large cap stocks (as represented by the S&P 500), are positioned to perform well over the next six to nine months.
“Hence, we see this pullback as a buying opportunity for large caps, recognizing that valuation and implied earning growth expectations remain constructive,” Mr. Levkovich said.