The stock market ‘casino’ is closed

By Paul R. La Monica, CNN Business

Investors have learned a bunch of hard lessons so far in 2022. The stock market doesn’t always go up. And factors such as the economy, earnings and valuations, which might sound like quaint relics of a bygone era, still matter even in a world seemingly dominated by memes and Reddit boards.

Picking winning stocks isn’t easy, especially at a time when the Federal Reserve is raising interest rates and inflation is starting to hurt consumers and the broader economy. Shares of many speculative tech companies are now tumbling due to worries about weakening fundamentals and unsustainable stock prices.

But this isn’t necessarily the worst news for the markets. Investors just need to once again do more homework to find good bargains.

“The casino is closed,” said Peter Mallouk, president and CEO of Creative Planning, a wealth management firm.

“The days of stimulus are over. This is now more of a thinking person’s market. Total speculation is dead,” Mallouk said, adding that traders can no longer pass around blank check SPAC stocks, cryptocurrencies, unprofitable tech firms and other risky investments like hot potatoes and hope someone else will want to catch them.

Stock picking seemed a lot easier when the Fed was doing everything in its power to try to stimulate the economy. Many investors do not have experience navigating the market when the central bank is jacking up rates in a bid to cool things down.

“The world is waking up to the fact that zero percent interest rates are done,” said Max Wasserman, co-founder of Miramar Capital. “Rates were real low and people took on excess risk because anytime the stock market pulled back, the Fed cut rates. The message was to buy the dips because the Fed has your back. But the party’s over.”

Forget the memes and focus on fundamentals

Some investors who were flush with Covid stimulus cash last year and chased meme stocks like GameStop and AMC may now be less bullish on individual stocks.

“The excitement of stock-picking and the active investing strategies approach reached new levels of popularity during the meme stock trading phenomenon in early 2021,” Lindsey Bell, chief markets and money strategist for Ally, said in a report late last week. “Now, stock market losses have made some investors sour on the strategy.”

But Bell noted that investors who do their homework can still “make smart investing decisions” as long as they maintain “a very hands-on style of investing” and don’t panic.

“When stocks are declining, a bear market is near and volatility is high, second-guessing investments is normal,” she wrote.

Wasserman said that stock picking isn’t dead per se. It’s just that now is a time for investors to look for quality companies that can perform well even as interest rates go up and the economy potentially slows as a result.

That means doing more than just buying the tech-heavy S&P 500, which is dominated by the likes of big Nasdaq leaders Apple, Tesla, Google owner Alphabet and Facebook parent Meta Platforms.

“You can’t just keep throwing money in the air and expect everything to go up. When you buy an ETF, you’re just buying a basket of stocks and everyone is buying that same basket” Wasserman said. “We’re not chasing the same things everyone else is chasing. There is more volatility to come and we hope to take advantage of that.”

Wasserman specifically recommends blue chip stocks that pay steady dividends and thinks investors should have their portfolios diversified throughout a variety of sectors.

With that in mind, he owns stocks ranging from brand name giants UPS, Coca-Cola and Pepsi to dividend-paying techs such as Corning, Microsoft and Texas Instruments. Wasserman said Timberland, The North Face and Vans owner VF Corp., medical devices leader Medtronic and gold miner Newmont are also solid values.

The good news — if you want to call it that — is that the current market turbulence doesn’t mean that a long bear market necessarily lies ahead.

“This could be bumpy, but not a crash. This whole turmoil may last less than a year and it’s already underway,” Mallouk said. “This is not like 2000 or 2009. This is a normal bear market.”

“The best place to build long-term wealth is still the stock market,” Mallouk added. “You may just have to hold your nose if you buy today.”

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