Even after a sharp decline, some investors see few indications of a bottom in U.S. stocks.
NEW YORK (Reuters) – Even though a huge selloff sent U.S. stocks into a bear market, investors don’t see much evidence that stocks have hit rock bottom. Concerns about rising inflation and a strong Federal Reserve continue to put pressure on asset prices.
The market has suffered significant losses. According to S&P Dow Jones Indices, the S&P 500’s 21.3 percent year-to-date loss as of Monday has wiped out nearly $8.7 trillion in market value this year.
Investors are planning for a rate hike of 75 basis points at the Fed’s monetary policy meeting on Wednesday. This is in response to the biggest rise in inflation in 40 years, and fears are growing that the central bank won’t be able to control consumer prices without starting a recession.
However, some analysts are not sure that all the necessary conditions have been met to signal the end of the downtrend.
“This is not always the appearance of a bottom,” “Mark Hackett, nationwide’s chief of investment research, stated as much. “Perhaps this is what a process of bottoming looks like.”
Since 1946, the S&P 500 has seen bear markets (https://graphics.reuters.com/USA-STOCKS/BOTTOM/egpbkgkkxvq/chart.png).
The S&P 500 ended Tuesday down 22.1% from its January 3 high.According to investment research firm CFRA, the average loss for bear markets since 1946 has been 32.7%, suggesting that the present decline may have more room to run.
From peak to trough, the typical bear market has lasted 389 calendar days, which is more than twice as long as the current bear market.
Hackett and other market participants are also keeping an eye on a number of technical indicators that show stock selling may have reached its peak.
One of the most well-known indicators is the Cboe Volatility Index, or VIX, which is often known as “Wall Street’s fear gauge” and gauges the expected volatility of the stock market as reflected in the prices of options.
Since 1990, the volatility index has averaged 37 at market bottoms, but surged to 85 during March 2020’s coronavirus-fueled market decline. During Monday’s selloff, the VIX soared to 35.05, which is above its long-term median of approximately 18, but still below peak levels in past bear markets.
“It appears that investors are less panicked and more resigned to the fact that the next six to twelve months will be a slog (and that elevated volatility is here to stay longer”), “wrote Chris Murphy, co-head of derivative strategy at Susquehanna International Group, in reference to VIX contracts extending into the following year.
The VIX (https://fingfx.thomsonreuters.com/gfx/mkt/zjvqklkqxvx/Pasted%20image%20201655235253967.png) and bear markets
According to data from Trade Alert, the number of put options, which investors use to protect their portfolios from falling stock prices, reached 2.03 million contracts on Monday, which was the highest level since February 28, 2020.
Some investors also keep an eye on how other investors feel in order to get into the market when pessimism is high and people are getting tired of selling.
Numerous such signs indicate deteriorating sentiment. The most recent weekly survey by the American Association of Individual Investors, for example, found pessimistic sentiment at 46.9 percent, higher than the long-term average of 30.5% but still lower than earlier in the year.
These numbers were before Friday’s higher-than-expected inflation reading, which sent markets plummeting and might further dampen investor morale.
Investors are in a bearish mood (https://graphics.reuters.com/USA-STOCKS/WEEKAHEAD/zdvxoeoonpx/chart.png).
Angelo Kourkafas, an investment strategist at Edward Jones, said, “Investors have been pessimistic for a while now, which means we may be close to a bottom, but we’re not quite there yet.”
Kourkafas said that, in addition to technical indicators, it will be hard for the market to hit bottom until investors are sure that inflation has gone down, which will let the Fed loosen monetary policy.
Others, though, urge investors to concentrate on the long run. Fewer than 5% of S&P 500 companies are trading above their 50-day moving average, according to Keith Lerner, co-chief investment officer of Truist Advisory Services.
This has happened only nine times since 1990, and each time the S&P 500 gained an average of 23 percent the following year.
In a paper published on Tuesday, he wrote that the market has already priced in a high risk of recession, that stocks are extremely oversold on numerous indicators, that valuations (although not cheap) have been reset, and that sentiment is down, “we would not cut equity exposure.”
