U.S. stocks have been experiencing their big “liquidation sale” for several decades. But have they reached the bottom of the barrel yet? Everyone will guess as they please.
Large-scale stock market sales in the US have been confusing strategists for some time trying to predict when these will end. Such cases in the past sometimes ended in a sales panic and that’s it, and in other sales periods, such as the one that lasted from 1973 to 1974, they only ended after long days, when trade continued at a lower volume.
Many investors and analysts who are examining the historical precedents for the case, believe that the S&P 500 has a long way to go before it reaches the bear market.
The index fell 19% from its January 3 high, flirting with a 20% drop that will end the bullish market that began in March 2020. This year’s stock sales, which are already in the fifth month, have been going on for a long time now than what usually happens without a recession. Deutsche Bank calculations.
Stock pressure will increase in the coming months
But the Federal Reserve is still in the early stages of its rate hikes move, which means financial circumstances will harden further, and stock pressure in the coming months will increase. Many people doubt that the central bank will have the ability to continue raising interest rates without tipping the economy in the direction of a recession, a period in which equities have often fallen by about 30 percent, as the Dow Jones data since 1929 show.
The data continue to suggest that this year’s stock sales, as painful as they are, have not caused a change in investor behavior as could be seen in previous cases.
Investors continue to hold a large portion of their investment portfolio in equities. The Bank of America announced this month that its private customers hold an average of 63% of their portfolio in equities – much more than it was after the economic crisis in 2008, when the average portfolio included only 39% in equities.
One of the measures of expected volatility in the market remains well below the threshold crossed in previous large sales. The Cboe Volatility Index, known as the “fear index” or VIX, jumped well over 40 in the sales periods of March 2020, November 2008 and August 2011. The year has not yet reached this level.
Also, investors have not escaped from some of the most battered parts of the market. The ARK mutual fund, led by Cathy Wood, has raised $ 1.4 billion in cash this year, although forecasts predict the worst returns since its inception, according to FactSet. Leveraged mutual funds that offer investors a way to increase bullish bets on the NASDAQ 100, as well as on shares of computer processor companies, have attracted billions of dollars in investments this year.
“We still need to shake the foam off the markets,” said Cole Smith, president and portfolio manager at Smead Capital Management. Like many other investors, Smith is trying to identify companies with attractive valuations, which he believes can withstand rising inflation and slowing growth. One of the companies that Smid is keeping an eye on is Starbucks, which previously owned its shares. But like almost everything in the stock market, the stocks of the coffee shop chain have also fallen this year.
Starbucks shares were down 37%, and are expected to perform the worst year this year since 2008. The S&P 500 was down 18% a year, posting its seventh consecutive weekly loss on Friday – the longest period of continuous declines since 2001.
“Things will get worse before they get better,” Smith said.
One reason many investors are now wary is the soaring inflation. The Fed is raising interest rates to try to curb inflation, which earlier this year rose at the fastest rate since the 1980s. The bank is aiming for a “soft landing” – that is, slowing down the economy enough to curb inflation, but while avoiding a bias in the US economy towards a recession.
Many investors fear that the central bank will not succeed, based on previous rounds of monetary policy tightening.
It will be difficult for markets to find the bottom
Looking back since the 1980s, the U.S. has slipped into recession four out of six times the Federal Reserve has taken steps to raise interest rates, according to a study by the St. Louis Federal Reserve. Prices at the time of the Russian invasion of Ukraine and China’s zero corona policy add to supply chain disruptions and inflationary pressures around the world.
“There is no chance in the world that the Federal Reserve will be able to crush inflation without significantly hurting domestic demand,” said David Rosenberg, president and chief economist at Rosenberg Research.
Rosenberg added that he believes markets will have a hard time finding the bottom line with certainty before the Fed completes the tightening of monetary policy, or perhaps the bank has convinced investors that it is able to lower inflationary pressures without causing a recession.
Others point out that the declines in stocks, while painful, have not yet reached the level of severity of bear markets from the past.
If examined since 1929, index S&P 500 It fell by an average of 36% during bear market times, according to data from Ned Davis.
The end of the sale will be “a great opportunity to buy, but I do not think that moment will necessarily come tomorrow,” Smith said.