Morgan Stanley tips how to pick the market bottom, but should you wait to buy ASX shares?

Are we there yet? Here are two factors that could determine whether it's time to start buying shares.

| More on:
Three colleagues stare at a computer screen with serious looks on their faces.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • This year has seen enormous volatility for the ASX share market
  • An expert from Morgan Stanley thinks that a bottom won’t be reached until inflation peaks and earnings estimates are reduced
  • But, it may not be the wisest strategy to wait too long to take advantage of these lower prices

This year has been a difficult one for many investment markets, including the ASX share market.

What's the best time to buy during this volatility? If we had a crystal ball, that'd make it obvious where the bottom of the decline is.

Some readers may have heard of the phrase about trying to catch a falling knife. Something that has fallen by 50% from $1 to 50 cents could easily fall another 20% to 40 cents. Just because something has fallen heavily doesn't mean it can't keep falling.

One investment expert has shared a couple of tips on how to identify when we could have reached the bottom.

Are we there yet?

Lisa Shalett is the chief investment officer of wealth management at Morgan Stanley.

She believes that we are "not quite" at the bottom. Morgan Stanley's global investment committee believes this latest bounce is "temporary, driven by technical factors, and that the bear-market bottom is still to come".

Shalett pointed out that the decline in valuations we're seeing is because of central banks increasing interest rates, rather than an economic crisis. This matters, in her opinion, because monetary policy was able to be used as an antidote to prior bear markets like the COVID-19 crash and the GFC.

This type of bear market tends to be "more prolonged".

What could help drive a recovery for the (ASX) share market?

There were "at least two" necessary conditions for reaching the bottom.

Shalett explained:

First, inflation needs to reach a viable peak. We may reach that soon. Although uncertainty remains, we see solid indications of both softer demand and more supply, suggesting that inflation is poised to decelerate in the months ahead.

Importantly, while peak inflation, and in turn, peak policy rates, may be sufficient to bring the bond market to a bottom, that likely won't be the case for stocks.

Stocks may need to fall farther, based on a sober assessment of year-ahead corporate earnings potential.

In other words, overly optimistic stock investors and Wall Street analysts must realistically factor in the potential depth and breadth of an economic slowdown and the consequent hit to employment and consumer demand. That forecast reset has just begun, yet the 2023­–2024 earnings picture is still far from clear.

Where are the opportunities?

Shalett said that investors should "remain patient" and avoid chasing index-level bear market rallies.

She suggested that businesses in healthcare, financials, energy, industrials and defensive, which have above-average dividend yields, could be promising.

However, investors might be missing out on opportunities by waiting too long, as the Motley Fool's Bruce Jackson pointed out. He also warned about the folly of trying to predict when news stories (macro factors) are going to impact the share market, and thinking that can inform people about when to "jump in and out of the market".

Jackson wrote:

Would your macro "analysis" have told you to jump back into stocks on October 1st, in advance of the big rally for that month?

And would your analysis now tell you to stay in, get in, get out or something in between?

I'd suggest it's a futile exercise at best, and likely a sub-optimal investing strategy.

If you invest in the stock market, you should make it a lifelong endeavour, not something you jump into and out of depending on your mood, the market's mood, or the macro environment.

In other words, if an investor sees an opportunity with an ASX share, it may be worth jumping on it. That bargain may not always be there. Plus, time in the market beats timing the market.

For me, a name like Wesfarmers Ltd (ASX: WES) could be something to like, with its diversified business operations, good dividend yield, investing in new areas for growth (lithium and healthcare) and its 25% decline this year.

Motley Fool contributor Tristan Harrison 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 positions in and has recommended Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

Man sitting in a plane seat works on his laptop.
Opinions

Expert reveals 2 ASX stocks to sell — and 1 is a recent IPO

Toby Grimm from Baker Young shares his insights.

Read more »

An analyst wearing a dark blue shirt and glasses sits at his computer with his chin resting on his hands as he looks at the CBA share price movement today
Opinions

Expert's verdict on 3 ASX 200 shares (2 have doubled in value and the other has lost 29%)

Two of these stocks were the best performers of their sectors in FY25. Should you buy, hold, or sell?

Read more »

A male investor sits at his desk pondering at his laptop screen with a piece of paper in his hand.
Opinions

Where I'd invest in ASX shares ahead of the likely RBA rate cut

These stocks look too good to miss.

Read more »

Person pretends to types on laptop drawn in sand.
Opinions

I sold one of my oldest ASX 200 shares last week. Here's why

Why would I sell one of my longest-held stocks?

Read more »

Broker analysing the share price.
Materials Shares

Buy, hold, or sell? Broker's verdict on 3 ASX 200 materials shares

Materials was one of four market sectors that weakened in overall value in FY25.

Read more »

A person sitting at a desk smiling and looking at a computer.
Technology Shares

3 ASX 200 tech shares to buy in July: Experts

The ASX tech sector delivered outstanding returns for investors in FY25.

Read more »

A group of executives sit in front of computer screens in a darkened room while a colleague stands giving a presentation with a share price graphic lit up on the wall
Opinions

2 ASX 200 large-cap shares that this fundie is cashing in after phenomenal growth

Shaw and Partners portfolio manager James Gerrish says he knows this will be an 'unpopular call'.

Read more »

Woman and man calculating a dividend yield.
Opinions

Buy or bail? Fundie's verdict on 2 ASX 300 shares

Stuart Bromley of Medallion Financial Group provides his insights.

Read more »