A brutal 2022 continues as the S&P 500 continues to face downward pressure. But is the stock market sell-off over, or is there more pain to come?
The market began the year overpriced by many measures like the P/E ratio. Once the fiscal and monetary stimulus was reined in and the Fed announced an interest rate hike to counter rampant inflation, things were always going to be challenging.
Additionally, fears are growing about the US and global economy. High-interest rates make future Tech stock profits less appealing, while retailers are hurting because of supply-chain problems. Even Energy stocks have taken a slight dip.
However, for some commenters, there are some positives. For starters, now that the buying frenzy is over, the markets could begin to make a little more sense.
Whatsmore, there may be some indications that the market has hit bottom, and now is the time for a slow and steady comeback.
Seven-week slump
Friday, May 20th, marked the seventh consecutive week that S&P 500 has closed negative. This situation has only happened three times previously, in:
- May 1970,
- March 1980,
- and March 2001.
Interestingly, the market was up by 33% (May 1970) and 35% (March 1980) in the twelve months after these previous incidents. However, in March ’01, the market finished up a paltry 0.22%.
Tech bounceback
Sell-offs in the tech sector have been significant. For example, Zoom lost about 85% from its peak during the pandemic when the video conferencing tool exploded in popularity. Analysts suggest the stock currently looks cheap, as Zoom could emerge as a great solution in the growing world of hybrid work.
Of course, while individual tech stocks could look like a bargain, the broader industry has been hurt by 40-year high inflation. Tech companies are priced largely on their future returns, and high inflation reduces the appeal of these profits.
However, inflation dipped from 8.5% to 8.3% between May and April. While some experts are worried a return to 2% might take longer than expected, any dip should favour tech.
In recent days, NVidia, Apple, and Alphabet have all recently clawed back some of their recent losses. That could be a sign of a larger upward trend.
Retail returns
The Consumer Discretionary sector has finished the week strongly. While supply-chain issues persist, retail is looking more robust than some people feared. The S&P retail ETF XRT gained 5%, with Macy’s (+15%), Tesla (7.7%+), and Amazon (4.5%) all rising.
Good time to buy?
Some experts are sure that it’s a great time to buy. While the old mantra of letting the dust settle is sound advice, the dip could offer a chance to get some solid equities at a discount while others are waiting for a bottom that we may never reach.
Warren Buffett is one man who has never been afraid to go against the grain. He has been loading up during the sell-off, which should give you some idea about his future outlook for the market.
Conclusion
The market is down more than 15% YTD. However, it’s pushed back over 4,000 this week. But while some positive signs are emerging, separating the signal from the noise isn’t easy.
It’s still a bit too early to call the bottom of the market. However, we are definitely in bearish territory, and the major problems facing the market haven’t suddenly gone away.
Inflation, supply-chain problems, and the invasion of Ukraine will all continue to exert pressure on the market. If the Fed missteps, we could see a recession in the US market.
Alpesh Patel OBE
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