NYSE
From a point on, there is no turning back. The stock market reached this point last week. Oh, the market was optimistic, going into the week, that inflation had peaked, that the Federal Reserve would stop raising interest rates soon, that the bottom had been hit. It was untamed and destroyed all the goodwill, sending the major indices to their worst day since 2020. Then FedEx (ticker: FDX ) decided to tell investors — a week early, mind you — that its earnings were terrible and that it was withdrawing its full-year guidance. All this happened the week before the Fed meets to discuss its next rate hike, which is likely to be another 0.75 percentage point. There’s no avoiding what’s coming, now, and the stock market knows it. The Dow Jones Industrial Average fell 4.1% for the week, while the S&P 500 fell 4.8% and the Nasdaq Composite fell 5.5%. “Investors are facing the reality that the Fed has more work to do and the risk of a recession is high,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US. “We are not talking about putting more money into the stock markets. We preach patience.” This seems to contradict the axiom that it often pays to be optimistic when everyone is predicting the worst. Sundial Capital Research’s Jason Goepfert notes that less than 1% of S&P 500 stocks finished higher on Tuesday, which has happened only 28 other times since 1940. The index has gained an average of 15.6% over the trailing 12 months and was higher 79% of the time. So is this a buying opportunity? Not so fast. Sometimes, the market can become “over-oversold,” notes Doug Ramsey, chief investment officer at Leuthold Group. This can be a prelude to further declines, as happened in 1998, before the long-term fund management crash. in 1987, before Black Monday. and before the worst bear market declines of 1973-74. “Extremely oversold conditions have preceded most of the worst short-term market crashes,” explains Ramsey. The odds of one are increasing. The Fed seems intent on getting inflation under control, and that could mean interest rates go much higher. Where once investors worried about a terminal rate of 3.5%, now they are talking over 4%, or even 5%. And once the Fed gets there, it’s likely to stay there rather than immediately start cutting rates. But bear markets typically don’t end—and bull markets don’t begin—until the Fed begins to ease, according to Ed Clissold, chief U.S. strategist at Ned Davis Research, and sometimes only after the second rate cut. . When a bear market is over before the Fed finishes raising interest rates, a second bear market usually occurs. “History suggests that the tightening cycle will cause more pain in the stock market,” Clissold writes. Even if this turns out to be wrong, this is no time to be a hero. Nordea Asset Management strategist Sebastien Galy notes that investors should try to identify companies that are “attractively valued solutions with lower downside risk that are resilient to multiple scenarios and styles,” a far cry from quality stocks. “What we can aim for is to manage these complex risks and start to position ourselves for the next few quarters at the right valuation,” he concludes. Or just wait. Write to Ben Levisohn at [email protected]
