Stock Market Bottom Remains Elusive Despite Deepening Decline

US stocks are in the midst of their longest sell-off in decades.

Whether they are close to bottoming or not is anyone’s guess.

Market sell-offs have long plagued strategists trying to predict when they are nearing completion. Some ended up with panic sales. Others, such as those that spanned from 1973 to 1974, ceased after several days of declining volume.

Many investors and analysts looking back at historic pullbacks believe that the current drop that took the S&P 500 to the top of a bear market still has a way to go.

The index is down 19% from its January 3 record, which together with a 20% drop will end the bull market that began in March 2020. This stock sell-off, now in its fifth month. , has been going on much longer than According to Deutsche Bank, the typical retracement occurs without a recession.

However, the Federal Reserve is still in the early stages of its rate hike campaign, meaning financial conditions will tighten further and put more pressure on equities in the coming months. Many doubt that the central bank will be able to keep raising interest rates without pushing the economy into a recession, a period in which stocks have typically fallen about 30% since 1929, according to Dow Jones Market Data.

Data continues to suggest that this year’s sell-off, although regrettably, has yet to lead to the kind of change in investment behavior seen in previous downturns.

Investors continue to have a large portion of their portfolios in the stock market. Bank of America Corp.

said this month its private clients have an average of 63% of their portfolios dedicated to stocks – far more than after the 2008 financial crisis, when they had just 39% stock portfolio.

A measure of expected market volatility that remains below the level it breached in previous sales. The Cboe Volatility Index, or VIX, rallied above 40 during the sell-offs in March 2020, November 2008 and August 2011. It has yet to close above that level this year.

Investors were in no hurry to get rid of some of the most underrated parts of the market. Exchange-traded fund ARK Innovation has raked in a net $1.4 billion this year, despite being on track to deliver the worst returns in its history, according to FactSet. Leveraged ETFs offer investors a way to amplify bullish bets on the Nasdaq-100, as do semiconductor stocks, which have attracted billions of dollars this year.

“We still need to address the market,” said Cole Smead, president and portfolio manager at Smead Capital Management.

Like many investors, Mr. Smead has tried to identify businesses with attractive valuations that he believes can withstand rising inflation and slowing growth. One company that Mr. Smead has his eye on is Starbucks Corp.

, which the company previously owned. But like most things on the stock market, the coffee chain’s shares have fallen this year.

Starbucks shares fell 37%, of course their worst since 2008. The S&P 500 Index fell 18% for the year and posted a seventh consecutive weekly loss on Friday – the longest streak since since 2001.

“Things are going to keep getting worse before they get better,” Mr. Smead said.

One reason many investors are cautious right now? Inflation spiked. The Fed is raising interest rates to try to rein in inflation, which earlier this year rose at its fastest pace since the 1980s. It is aiming to make a “soft landing” — in other words, slow it down. economy enough to contain inflation but avoid sending the US into recession.

Many investors fear the central bank will fail, based on previous cycles of monetary tightening.

Going back to the 1980s, the US fell into a recession four of the six times the Fed launched a rate hike campaign, according to research from the Federal Reserve Bank of St. Louis. This time around, the central bank faces the additional challenge of trying to control price increases while Russia’s invasion of Ukraine and China’s zero-Covid policy add to supply chain disruptions and inflationary pressures across the globe. Around the world.

“There’s no hell of a chance the Fed will be able to crush inflation without significantly dampening domestic demand,” said David Rosenberg, president and chief economist at Rosenberg Research.

Mr. Rosenberg added that he believes the markets will have a hard time finding a solid bottom before the Fed tightens monetary policy, or it convinces investors that they are succeeding in the trade. reducing inflationary pressures without the risk of recession.

Others noted that the stock’s decline, while regrettable, has yet to reach the severity of previous bear markets.

Back in 1929, the S&P 500 fell an average of 36% in a bear market, according to data from Ned Davis Research.

The end of the sell-off would be “a great buying opportunity, but I don’t think that time will necessarily come tomorrow,” Mr. Smead said.

Write to Akane Otani at akane.otani@wsj.com

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Edmund DeMarche

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