US stocks are in the midst of their longest selloff in decades.
Whether they are close to bottoming is anyone’s guess.
Market sell-offs have long baffled strategists trying to predict when they were about to end. Some concluded with flurries of panicked sales. Others, like the one that lasted from 1973 to 1974, ended after days of subdued trading volumes.
Many investors and analysts who look at historical setbacks believe that the current crisis that has put the S&P 500 on the cusp of a bear market still has some way to go.
The index is down 19% from its high of Jan. 3, flirting with the 20% decline that would end the bull market that began in March 2020. This year’s equity selloff, which is now in its fifth month, has already lasted far longer than the typical pullback occurring without a recession, according to Deutsche Bank.
Still, the Federal Reserve is still in the early stages of its interest rate hike campaign, which means that financial conditions will tighten further and put more pressure on stocks in the coming months. Many people doubt the central bank can keep raising rates without tipping the economy into a recession, a time when stocks have typically fallen about 30% since 1929, according to Dow Jones Market Data.
The data continued to suggest that this year’s sell-off, while painful, has yet to bring about the kind of changes in investment behavior seen in previous downturns.
Investors continue to have a good portion of their portfolios in the stock market. Bank of America Corp.
said this month that its retail clients had an average of 63% of their portfolios in equities, significantly more than after the 2008 financial crisis, when they had just 39% of their portfolios in equities.
A measure of expected market volatility remained firmly below levels it had breached in previous selloffs. The Cboe Volatility Index, or VIX, jumped well above 40 in the selloffs of March 2020, November 2008 and August 2011. It has yet to close above that level this year.
Investors did not rush into some of the worst parts of the market. The ARK Innovation exchange-traded fund generated net inflows of $1.4 billion this year, although it is on track to generate its worst returns in its history, according to FactSet. Leveraged ETFs that offer investors a way to amplify bullish bets on the Nasdaq-100, as well as semiconductor stocks, have attracted billions of dollars in inflows this year.
“We still have to shake off the scum from the markets,” said Cole Smead, president and portfolio manager of Smead Capital Management.
Like many other investors, Smead has tried to identify companies with attractive valuations that he believes can weather rising inflation and slowing growth. One company Mr Smead has eyed is Starbucks Corp.
, whose shares were previously owned by the company. But like almost everything else in the stock market, shares of the coffee chain have fallen this year.
Starbucks shares are down 37%, on course for their worst year since 2008. The S&P 500 is down 18% for the year and posted its seventh consecutive weekly loss on Friday, its longest streak since 2001.
“Things will keep getting worse before they get better,” Mr Smead said.
One reason many investors are cautious right now? Galloping inflation. The Fed is raising interest rates in an attempt to rein in inflation, which earlier this year rose at the fastest pace since the 1980s. It aims to pull off a “soft landing,” that is, say to slow the economy enough to curb inflation while avoiding tipping the United States into a recession.
Many investors are concerned that the central bank may not succeed, based on previous rounds of monetary policy tightening.
In the 1980s, the United States went into recession four of the six times the Fed launched interest rate hikes, according to a study by the Federal Reserve Bank of St. Louis. This time around the central bank has the added challenge of trying to rein in price rises while Russia’s invasion of Ukraine and China’s zero Covid policy add to supply chain disruptions and inflationary pressures around the world.
“There’s no way the Fed will be able to crush inflation without significantly hurting domestic demand,” said David Rosenberg, chairman and chief economist of Rosenberg Research.
Mr. Rosenberg added that he thinks markets will struggle to find a definitive bottom until the Fed finishes tightening monetary policy, or convinces investors that it is succeeding in lowering prices. inflationary pressures without risking a recession.
Others note that the declines in equities, while painful, have yet to reach the severity of past bear markets.
Going back to 1929, the S&P 500 has fallen an average of 36% during a bear market, according to data from Ned Davis Research.
The end of the selloff will be “a great buying opportunity, but I don’t think that moment will necessarily be here tomorrow,” Smead said.
Write to Akane Otani at [email protected]
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