From a certain point there is no turning back. The US stock market finally reached that point last week. The market was hoping that during the week that inflation peaked, that the Federal Reserve would soon stop raising interest rates, that the low for indices and stocks had hit.
But recently released CPI data for August showed that inflation was not “tamed” and that burned all the goodwill, sending the major indices to their worst day since 2020. So FedEx has decided to tell investors – a week in advance, mind you – that our earnings were terrible and that we were retiring our forecast for the full year.
This all happened the week before the Fed met to discuss the next interest rate hike, which is expected to be another 0.75 percentage points. Now you can’t avoid what’s coming and the stock market knows it. The Dow Jones Industrial Average fell 4.1% during the week, while the S&P 500 fell 4.8%.
The biggest loser, logically enough, was the Nasdaq Composite, which fell 5.5%. “Investors are facing the reality that the Fed still has work to do and the risk of a recession is high,” according to Dave Donabedian, chief investment officer of CIBC Private Wealth US, quoted by the Barrons financial publication. “We do not recommend investing more money in the capital markets. We preach patience.”
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This seems to contradict the maxim that it is often worth being optimistic when everyone is predicting the worst. Jason Goepfert of Sundial Capital Research noted that less than 1% of shares in the S&P 500 closed higher on Tuesday, which has only happened 28 more times since 1940. The index, however, gained an average of 15.6%. in the past 12 months and was higher 79% of the time.
So is it a buying opportunity?
Don’t be in such a hurry! At times, the market can become “oversold,” notes Doug Ramsey, Leuthold Group’s chief investment officer. This could be the prelude to further declines, as happened in 1998; in 1987, before “Black Monday”; and before the worst bear market sell-off of 1973-74.
“Oversold conditions preceded most of the worst short-term market crashes,” says Ramsey. The chances of such an accident are increasing.
The Federal Reserve appears determined to curb inflation and that could mean interest rates will rise a lot. While investors worried about a terminal rate of 3.5%, they are now talking about over 4% or even 5%. And once the Fed gets there, it is likely to stay there rather than immediately start cutting rates.
However, bear markets typically don’t end – and bull markets don’t start – until the Fed begins easing monetary policy, according to Ed Clissold, US chief strategist at Ned Davis Research, and sometimes not until after the second rate. cut.
When a bear market has ended before the Fed has finished raising interest rates, a second bear market usually occurs.
“History suggests that a tightening cycle will cause more pain in the stock market,” Clissold wrote. Even if he turns out to be wrong, this is no time to be a hero.
