Wednesday, May 11, 2022
As volatility grips markets, investors are naturally wondering when the selling will abate and the bottom will be put in.
According to a number of pundits, the answer is probably not quite yet.
Stocks have fallen sharply for the year-to-date and in the past several weeks especially. The S&P 500 has tumbled 16% so far in 2022, and by a slightly more pronounced 16.6% from its recent record closing high from January 3. The tech-heavy Nasdaq Composite has performed even more poorly, sinking 25% for the year-to-date and by about 27% from its recent record high from Nov. 19, 2021. But even after these double-digit losses, stocks may still have further to decline before bottoming.
According to Bank of America, bear markets have lasted an average of 289 days with an average price decline of 37.3%, based on data from 19 bear markets that have taken place over the past 140 years.
Technically, the S&P 500 has not yet officially fallen into a bear market, which is typically defined when the index closes at least 20% below its recent record closing high. However, the index has quickly neared that threshold, and many pundits have suggested stocks in general are trading as though they're already in one.
“Past performance [is] no guide to future performance, but if it were, today’s bear market ends Oct. 19th, 2022, with [the] S&P 500 at 3,000 [and] the Nasdaq at 10,000,” Michael Hartnett, Bank of America Global Research chief investment strategist, wrote in a note Friday. The S&P 500 and Nasdaq Composite closed Tuesday’s session at 4,001.05 and 11,737.67, respectively.
Many stocks individually have fallen much further. As SoFi’s Liz Young points out, as of Tuesday, only about 16% of Nasdaq Composite stocks were trading above their 200-day moving averages, or a key technical indicator of a stock’s price trends. That’s nearing the ultra-low percentages seen at the market bottoms over the past two decades, including in 2020 (about 6%), 2018 (9%) and 2009 (4%).
Only 16% of Nasdaq stocks are trading above their 200-day MA. Getting close to levels of prior market bottoms (2002, 2009, 2018, 2020). Still won't call it, but if you like watching these indicators, here we are 👀 pic.twitter.com/DFHveVSMbN
— Liz Young (@LizYoungStrat) May 10, 2022
Plus, the relative outperformance of one stock in particular solidifies to at least some strategists that more selling may need to happen before the bottom gets called.
Namely, mega-cap technology stock Apple (AAPL) continues to show resilience even in the face of heightened volatility – and when such a significant company and heavily weighted index component refuses to break down, that can be a sign that the bottom hasn’t yet been put in, according to DataTrek Research’s co-founder Nicholas Colas.
“Market lore has it that investable bottoms happen when the best companies underperform. We agree with that sentiment,” Colas wrote in a note Monday. “If and/or when AAPL does ‘break,’ that will be one important sign we’re at investable lows.”
“We know global equity investors are treating AAPL as the safest port in the current storm. We see it in the return data. We see it in Warren Buffett's recent endorsement,” he added. So far, Apple has fallen 13% for the year-to-date, versus the S&P 500's 16% drop. “Giving up on Apple, with its global market share, long term track record of profitability, and fortress balance sheet, is something like the ‘give up on America’ trade from 2009 ... if AAPL does eventually get caught up in a massive U.S./global equity downdraft, that will be one sign we are at truly investable lows."
All this said, this is in no way an endorsement for trying to time the market or for attempting to buy stocks precisely at the bottom. The likelihood of getting that timing right is extremely low. Instead, this is meant to put into context some of the conditions that may signal the market has discounted enough of the “bad news” that the known risks and peak pessimism have been more fully reflected in equity prices.
And to that end, the market today seems not to have fully discounted the bad news – because the market doesn’t seem to know how bad things may get given all that’s taking place.
The outcome of Russia’s war in Ukraine, and the full extent of supply chain disruptions due to virus-related lockdowns in China, remain to be seen. There’s still a lot of uncertainty about how much and how quickly the Federal Reserve will need to raise interest rates in order to bring down inflation. And in a similar vein, uncertainty still abounds around whether the Federal Reserve’s rate hikes and broader tightening of financial conditions will ultimately trigger a full-blown recession in the U.S. economy. Goldman Sachs economists reiterated earlier this week they saw the probability of a U.S. recession within two years at 35%.
“Bear markets without recession tend to be short and shallow,” John Lynch, chief investment officer for Comerica Wealth Management, said in a note Monday. “It’s conceivable the S&P 500 needs to establish a bottom in the 3,850 to 4,000 range. Without recession in 2022, which is our base case, stocks can resume higher as equity investors discount cyclical recovery in an environment where monetary policy is no longer shepherding expensive growth and technology names at a multiple of sales.”
What to watch today
7:00 a.m. ET: MBA mortgage applications, week ended May 6 (2.5% during prior week)
8:30 a.m. ET: Consumer Price Index, month-over-month, April (0.2% expected, 1.2% in March)
8:30 a.m. ET: Consumer Price Index excluding food and energy, month-over-month, April (0.4% expected, 0.3% in March)
8:30 a.m. ET: Consumer Price Index, year-over-year (8.1% expected, 8.5% in March)
8:30 a.m. ET: Consumer Price Index excluding food and energy, year-over-year, April (6.0% expected, 6.5% in March)
2:00 p.m. ET: Monthly Budget Statement, April ($260.0 billion expected,, -$225.6 billion in March)
6:00 a.m. ET: Yeti Holdings (YETI) is expected to report adjusted earnings of 32 cents per share on revenue of $290.6 million
6:30 Olaplex (OLPX) is expected to report adjusted earnings of 11 cents per share on revenue of $172.44 million
6:40 a.m. ET: Krispy Kreme (DNUT) is expected to report adjusted earnings of 7 cents per share on revenue of $367.86 million
4:05 p.m. ET: Disney (DIS) is expected to report adjusted earnings of $1.18 per share on revenue of $20.11 billion
4:05 p.m. ET: Bumble (BMBL) is expected to report adjusted earnings of 2 cents per share on revenue of $208.27 million
4:05 p.m. ET: Sonos Inc. (SONO) is expected to report adjusted earnings of 17 cents per share on revenue of $351.67 million
4:05 p.m. ET: Beyond Meat (BYND) is expected to report adjusted losses of 98 cents per share on revenue of $112.17 million
4:05 p.m. ET: Dutch Bros. (BROS) is expected to report adjusted earnings of 1 cent per share on revenue of $145.9 million
4:30 p.m. ET: Rivian Automotive (RIVN) is expected to report adjusted losses of $1.45 per share on revenue of $131.2 million
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