Buy a dip or sell a ‘rip’ ?: What will happen after the S&P 500 test beer market?

Investors, already embroiled in a sinking stock market and fearing that the US economy could go into recession, are now shifting their focus to consumers. For one thing, consumer discretionary stocks hurt the most.

According to Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute, market stabilization on high inflation and how many times the Federal Reserve can raise interest rates are leading to recession fears.

The change came last week as stocks sank amid investor concerns about consumer spending trends, Christopher said in a phone interview.

“The market has finally started prices in a realistic recession,” he said.

For now, the mood of consumers has proved to be as tough as market entry and exit.

Online brokerage firm Tastytrade Inc. Its chief market strategist JJ Kinahan said in a phone interview that the recession was “very difficult to sit on”. “It’s like boxing day after day, kicking your butt, but you still haven’t dropped out. So you have to go back and box again. ”

Stocks have not yet seen a “big low” and since the market is risky for a beer-market rally, sell any “rips”, BofA Global Research advised investment strategists in a May 19 note.

Friday, S&P 500 Index SPX,
+ 0.01%
The bear-market area traded up but avoided closing there as it made a profit out of a mixed close for U.S. stocks. Even so, the S&P 500 and other major benchmarks, including the Dow Jones Industrial Average DJIA, have suffered one more week of losses.
+ 0.03%
Booked an eighth consecutive weekly fall for the longest losing streak since April 1932.

In a May 18 note, Wells Fargo Investment Institute said it was adjusting its equity guidelines and pricing targets for a “potential” recession, upgrading the utility sector from “most unfavorable” to “neutral.” In contrast to the consumer-oriented sector, utilities are considered defensive, which has been downgraded from “neutral” to “unfavorable”, according to a Wells Fargo note.

Consumer Consideration SP500.25,
-1.53%
Friday was the worst performing sector of the S&P 500 index, closing lower for its longest losing streak since July 1996 and booking for the seventh week in a row, according to Dow Jones market data.

Read: Retail stock issue hits consumer sector ETFs as S&P 500 approaches market area

Here are the preferences of Wells Fargo’s equity sector, as seen in the May 18 report.

Wells Fargo Investment Institute

‘Sticky’ inflation

“Inflation is hurting purchasing power,” Christopher said. “It’s so sticky,” he said, “that it’ll stay with us for a while, even if the Fed raises the rate.”

Earnings as a result of earnings reported by Walmart Inc. WMT.
+ 0.11%
And Target Corporation TGT,
+ 1.26%
This past week has raised concerns among investors that high inflation is cutting consumer spending, while the company is eating up profit margins. Shares of Walmart fell more than 19% last week and the target fell nearly 29%.

Read: Walmart says consumers are trading on private labels for items such as milk and bacon

“Unfortunately, gasoline prices hit another record high in May, and with inflation rising in most sectors, people are spending more on lesser items,” said Beth Ann Bovino, chief economist at S&P Global Ratings, in an emailed comment in May. 17.

When S&P adjusted U.S. retail sales in April for inflation, “there has been a frightening split over the past year, and only in April has it widened further,” Bovino said.

S&P Global

“Purchasing power has been reduced, especially for low-income families,” he said. “Although the savings accumulated during the epidemic have given households a cushion to absorb these high values, eventually these buffers become thinner.”

Although labor markets remain strong, new U.S. unemployment claims rose to a four-month high in the week ending May 14. Christopher said the Wells Fargo Investment Institute believes “a mild recession” could begin later this year.

They are not alone.

“We expect that the tightening of the financial situation due to the Fed’s policy is likely to lead to a recession by the end of 2023,” Deutsche Bank analysts wrote in a May 20 study note, led by chief US economist Matthew Lujetti. In recent weeks, the US financial situation has tightened sharply. “

Wells Fargo Investment Institute

This coming week, investors will receive new economic data about inflation, consumer spending and disposable income. The U.S. Economic Calendar also includes minutes on consumer attitudes, U.S. manufacturing and services, initial unemployment demands, and the last policy meeting of the Federal Open Market Committee.

Desperate investors

As investors waver, stock-market bottoms continue to form after the “panic sell-off” and the recent recession has so far been “chained”, according to Tastytrade’s Kinahan.

According to FactSet, the S&P 500 is down about 18% as of Friday this year, while the Dow is down 14% and the tech-heavy Nasdaq Composite is down about 27%.

Read: The S&P 500 contracts a bear market. How long do they last after they arrive?

Through the lens of bullish investors, bear markets include “jungle, frightening, dystopian price action,” BofA investment strategists wrote in their notes. “The tape already shows big losses,” with “inflation shocks” and “rate shocks” costing more.

Once the “recession shock” is relieved, “low will be set,” strategists wrote, citing a bullish outlook.

While both Kinahan and Wells Fargo’s Christopher warned against trying to give the market time, Kinahan described any attempt to pick down as a “stupid act”.

Christopher says investors may consider keeping a small amount of cash to work over time as the market falls to new lows and consider buying quality stock to reduce losses. “If you’re a long-term investor, you don’t want to withdraw money from the market,” he said.

As the risk of a recession increases, Wells Fargo Investment Institute lowered its year-end target price range for the S&P 500 from 4,500-4,700 to 4,200-4,400, his report shows. It is at 3,901 above the index close on Friday.

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