U.S. stocks are in the midst of their longest sell-off in decades.
One wonders if they are close to bottling.
Market selloffs have long stalled strategists trying to predict when they were nearing completion. Some have come to the conclusion that there is an explosion of panic. Others, such as those that lasted from 1973 to 1974, came to an end after a few consecutive days of declining trading volume.
Many investors and analysts are looking back at the historic pullback, believing that there is still a way out of the current recession that has pushed the S&P 500 to the top of the bear market.
The index fell 19% from its January 3 record, flirting with a 20% fall that would end the bull market starting in March 2020. This year’s stock sales, now in its fifth month, are already much longer than usual, according to Deutsche Bank.
Yet the Federal Reserve is still in the early stages of a campaign to raise interest rates, which means the financial situation will tighten and put more pressure on stocks in the coming months. Many are skeptical that the central bank will be able to raise rates without pushing the economy into recession, a period when stocks typically fell 30% in 1929, according to Dow Jones market data.
Data continues to suggest sales this year, albeit painfully, has not yet created the kind of change in investment behavior seen in the previous recession.
Investors have a huge share of their portfolios in the stock market. Bank of America Corporation.
It said this month that an average of 63% of its private clients dedicated their portfolios to stocks – after the 2008 financial crisis, when only 39% of their portfolios were in stock.
A measure of the expected market volatility is firmly below the level violated during the previous sell-off. The Cboe volatility index, or VIX, jumped well above 40 during the March 2020, November 2008, and August 2011 selloffs. This year it has not yet closed above that level.
Investors have not come out of some of the most volatile parts of the market. According to Factset, ARK Innovation Exchange-Traded Fund is pulling in নেট 1.4 billion in net inflows this year, although it is on track to deliver the worst return in its history. Leveraged ETFs that offer investors a way to extend bullish bets on Nasdaq-100, as well as semiconductor stocks, have drawn billions of dollars in inflows this year.
“We still need to get out of the market,” said Cole Smith, president and portfolio manager at Smead Capital Management.
Like many other investors, Mr. Smed is trying to identify businesses with attractive valuations that he believes can withstand rising inflation and slower growth. A company belonging to Starbucks Corporation has caught the eye of Mr. Smed.
, Whose shares the firm previously owned. But like almost everything in the stock market, coffee chain shares have fallen this year.
Shares of Starbucks fell 37%, their worst year since 2008. The S&P 500 fell 18% for the year and posted its seventh consecutive weekly loss on Friday – its longest trend since 2001.
“Things are going to get worse before things get better,” Mr. Smed said.
One reason many investors are now wary? Upward inflation. The Fed is raising interest rates to keep inflation in check, the fastest pace since 1980 earlier this year. It aims to close a “soft landing” – in other words, slows down the economy enough to keep inflation in check but prevents the United States from heading into recession.
Many investors fear that the central bank will not succeed on the basis of the previous cycle of tightening monetary policy.
According to a study by the Federal Reserve Bank of St. Louis, the United States fell into recession back in the 1980’s when the Fed began promoting interest rate hikes. At this juncture, the central bank faces additional challenges in trying to control inflation, as Russia’s invasion of Ukraine and China’s zero-kovid policy disrupt global supply chains and increase inflationary pressures.
David Rosenberg, president and chief economist at Rosenberg Research, said: “There is no chance that the Fed will be able to contain inflation without significantly hurting domestic demand.
Mr Rosenberg added that he believes it will be a difficult time to find a specific floor in the markets before the Fed tightens monetary policy, or that investors believe it is succeeding in easing inflationary pressures without the risk of a recession.
Others feel that the fall in stocks, though painful, has not yet reached the intensity of the Eastern bear market.
According to Ned Davis Research, going back to 1929, the S&P 500 fell 36% on average in the bear market.
The end of the sale will be “a great buy opportunity, but I don’t think that moment will be here tomorrow,” Mr. Smed said.
Write Akane Otani at [email protected]
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