Deeply Unpopular Stocks: Strategist Recommends Stocks to Ride Out the Sell-Off

Chris Watling, head of the London-based research firm Longview Economics, identified European consumer staples stocks as a safe haven where investors can ride out the market sell-off. The strategist explained his choice by citing the stocks’ valuations: “It’s not the trendiest sector, but relative to the market, it has never been this cheap.”

According to Watling’s forecast, a sell-off of risky assets is brewing and is about to begin, lasting anywhere from two months to half a year. The U.S. S&P 500 stock index—a barometer of the U.S. economy—will fall by 10–20% during this period, the strategist said on CNBC.

According to Watling, two factors foreshadow a sell-off: global liquidity is shrinking, and major central banks have shifted from cutting interest rates to raising them. He sees signs of tightening liquidity in the sharp rise in the risk premium on French government debt and its spread relative to bonds from other eurozone countries, in the strain on the U.S. corporate bond market—particularly among the riskiest “junk” bonds rated CCC and in the high-yield segment as a whole—as well as in certain segments of the stock market. “It’s like a pressure cooker, and I think this happens every few years,” the strategist said.

In September, the U.S. Federal Reserve raised interest rates for the first time since 2023—to 3.75–4%. Goldman Sachs analysts calculated that experience over the past few decades shows that the U.S. stock market typically declines after the central bank begins tightening monetary policy. However, six months after the first rate hike, the S&P 500 is back in positive territory, the bank noted.

Wotling sees strong parallels with 2011, 2015, and 2018. Back then, the market “treaded water” at the start of the year, then moved upward—though increasingly driven by a narrow group of companies—and was soon followed by a sharp sell-off. Now, according to the strategist, investors find themselves in the same situation: “Interest rates are rising. The bulls say, ‘Well, there are seven stocks with amazing earnings growth—don’t worry.’ But in reality, everything is gradually getting cheaper. The dominoes are falling.”

To enter the consumer staples sector, Watling suggests waiting for a turnaround in the bond market: “These stocks are deeply unpopular [with investors], have fallen sharply in price, and, of course, are highly sensitive to rising bond yields. And when that rise stops, I think it will become clear that precisely these market segments are a good safe haven for a few months.” For now, this rise continues: On October 8, the yield on benchmark 10-year Treasuries rose to 5.35% —a high not seen since 2002.

Watling does not expect a recession: in his view, the U.S. economy is in good shape. He considers the predicted decline to be a correction that will occur in the midst of an economic upswing and will not signal its end. According to Watling, U.S. bond yields are rising primarily because companies are investing more rapidly in AI and increasing their borrowing, which should accelerate growth. The strategist believes that a sell-off in risky assets will force the market to revise its rate expectations and restore liquidity to the system.

ECB economists also view this as a likely correction. In an article dated August 17, they cite the experience of past technological revolutions, from railroads to the Internet: when know-how spreads throughout the economy, investors demand a higher risk premium, and stock prices may fall even if the new technology proves successful. The blog’s authors acknowledged that stock prices may not have yet reached their peak: “If AI changes the economy significantly enough, future [stock] valuations could be much higher, even after a correction.”

This article was AI-translated and verified by a human editor