Breaking down the market’s tumble into a bear market — and what comes next
[ad_1]
This past week saw some very grim milestones in the stock market’s relentless decline. The S & P 500 briefly dipped on Friday into bear market territory, trading more than 20% below its January intraday record. A bear market is not officially recognized, and investors may debate whether they are currently in one. Many on Wall Street define it as what we saw on Friday — a 20% drop from an intraday 52-week high. Some want to see the bear market end on a closing basis before calling it one. Many believe that we’re in the midst of a bear market, which began in January. The tech-heavy Nasdaq Composite fell deeper into it’s own bear market — now down nearly 30% from its record. This was the 8th consecutive week of declines for Dow Jones Industrial Average. This is the Dow’s eighth consecutive week of declines since 1923. The S & P 500 and Nasdaq Composite fell for a seventh straight week, losing 3.1% and 3.8%, respectively. This sell-off comes after investors shun risk assets because they are concerned about the state of the U.S. consumer and companies’ ability to deal with the inflationary rise. Meanwhile, the Federal Reserve has stated it will keep raising rates to quell those pressures — raising worries that tighter monetary policy could tip the economy into a recession. This is how the market fell this week and what Wall Street professionals think might happen next. What caused this? Target earnings and Target earnings. Powell comments. This week’s falls were triggered by back-to-back quarterly reports from Walmart and Target, showing that both businesses struggle to keep up with increasing costs. Target and Walmart’s latest earnings reports reminded us this week that increasing sales does not always mean higher earnings. While inflation might have provided a boost to retailers’ profits, it was also accompanied by higher-than expected expenses and lower margins,” stated Ed Yardeni Research, chief investment strategist. He said that in addition to the cost inflation, there were supply-chain issues which afflicted some of America’s biggest retailers. This was also evident from tough comparisons with last year when consumers had no federal subsidies. Investors worried that inflation will eat away at the profits of other businesses caused a dramatic market decline Wednesday. The Dow and S & P 500 fell 3.6% and 4%, respectively, that day — their biggest one-day losses since June 2020. Meanwhile, Wednesday’s 4.7% decline in the Nasdaq was its biggest daily fall since May 5th. These numbers raised concerns over consumer health. Walmart stated that customers were purchasing fewer products, and many people are skipping new clothes and other items. Target, however, stated that consumers are buying less expensive items like TVs. Target’s shares finished the week with a 29.3% drop, which was their largest weekly decline since October 1987. Walmart stock dropped 19.5% which is the worst weekly fall since October 1974. Moreover, the Fed doesn’t appear to be coming to market’s rescue anytime soon. Jerome Powell, Fed chair, said Tuesday that prices will start to ease from their current levels by raising rates. He said, “If it means moving beyond broadly understood levels neutral, we won’t hesitate,” “We will get there. “There won’t be any hesitation.” Wall Street is concerned that the Fed’s hawkish approach could lead to a downturn in economic growth. Scott Minerd, Guggenheim’s economist, called the Fed’s tightening plan “overkill” and noted that “Given Federal Reserve’s aggressive position, we will be significant lower in stocks this year before we find bottom. The Fed has stated they don’t have any ‘put’ to the stock market. They are happy to let the stock markets fall as long it doesn’t threaten financial stability. What happens next: It depends on the economy Several strategists on the Street have already trimmed their year-end targets for the S & P 500, but many of them think what happens next depends on whether the U.S. economy falls into a recession. Deutsche Bank’s Binky Chadha said in a note this week that the S & P 500 could tumble all the way down to 3,000 if a recession takes hold in the near future. This is 23% less than the previous level. Chadha stated that inflation is becoming sticky, and that the Fed’s forward guidance for rate hike cycles that have historically led to recession (8 of 11 and 73% respectively), is accepted and acknowledged by the Fed. He also noted that his base case does not predict an imminent recession. The strategist trimmed his 2022 S & P 500 base case target to 4,750 from 5,250 . Meanwhile, Bank of America said there’s a “realistic worst case” scenario where the S & P 500 falls to 3,200, with strategist Savita Subramanian noting that the current market set-up looks a lot like the one seen as the 2000 dotcom bubble was bursting. CNBC’s Jeremy Grantham told CNBC that the bubble today is more dangerous than those of 2000. “The other day, we were down about 19.9% on the S & P 500 and about 27% on the Nasdaq. GMO’s co-founder said Wednesday that we would likely do at least twice that. Kelly Evans was on CNBC’s “The Exchange.” We could also do three legs if we were unlucky. It might take as long or longer than it took in the 2000s. It was the first time that the U.S. has seen a decline in its economy since the start of the pandemic. Others are optimistic that a recession could be avoided. Marko Kolanovic of JPMorgan, who was able to navigate the markets through the pandemic effectively, believes that the stock market has priced in too much risk. Kolanovic wrote that if recession does not come through multiple derating was already quite substantial and, given the decreased positioning and downbeat mood, equity stand to recover.”
[ad_2]