From a certain point onwards, there is no turning back. The stock market reached that point last week.
Oh, the market was hoping, going into the week, that inflation had peaked, that the Fed would stop raising interest rates soon, and that the bottom was at. But Tuesday’s release of CPI data for August showed that inflation had not been tamed and all goodwill was destroyed, sending key indicators into Their worst day since 2020.
then
FedEx
(Stock ticker: FDX) I decided to tell investors – a week ago, keep in mind – that Her earnings were horrific And she was withdrawing her guidance for the whole year. All of this happened a week before the Fed met to discuss the next rate hike, which is Likely another 0.75 percentage point.
There is now no escape from what is to come, and the stock market knows it. The
Dow Jones Industrial Average
And fell 4.1% during the week, while
Standard & Poor’s 500
The index fell 4.8% and
Nasdaq Composite
It fell 5.5%.
“Investors are faced with the fact that the Fed has more work to do and recession risks are high,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US. We’re not talking about pumping more money into the stock markets. We preach patience.”
This seems to run counter to the principle that it often pays to be optimistic when everyone else is expecting the worst. Jason Goepfert of Sundial Capital Research notes that less than 1% of stocks in the S&P 500 closed higher on Tuesday, something that has only happened 28 times since 1940. The index gained an average of 15.6% over the next 12 months, and was higher 79% of the time.
Is this a buying opportunity?
Not so fast. Sometimes the market can become “oversold,” notes Doug Ramsay, chief investment officer at Leuthold Group. This could be a prelude to further declines, as was the case in 1998, before long-term capital management faltered; In 1987, before Black Monday; And before the worst of the 1973-1974 bear market sell-off. “Most of the worst short-term crashes in the market have been preceded by oversold conditions,” Ramsay explains.
The odds are increasing. The Fed seems very intent on controlling inflation, and that could mean a lot higher rates. Where investors once worried about a final interest rate of 3.5%, they are now talking about 4%, or even 5%. Once the Fed is there, it is more likely to stay there rather than start cutting rates immediately.
However, bear markets don’t usually end — and bull markets don’t start — until the Fed starts easing, according to Ed Clisold, chief US strategist at Ned Davis Research, sometimes not until after the second rate cut. When a bear market ends before the Fed has finished raising interest rates, a second bear market usually occurs. “History says the tightening cycle will inflict more pain on the stock market,” Clisold writes.
Even if that turns out to be untrue, there is no time to be a hero. Sebastian Galley, Nordea Asset Management Strategist, points out that investors should try to identify companies that have “attractive value solutions with lower downside risk and flexibility across many scenarios and approaches,” which is a long way of saying quality stock. He concludes, “What we can fight for is to manage these complex risks and begin to position them for the next few quarters when properly assessed.”
Or simply wait for it.
write to Ben Levisohn at Ben.Levisohn@barrons.com
