Barons May 20th 2022 |Markets|The Trader| “The Stock Market Has Avoided a Bear. But the Selloff Isn’t Over” “Big drops could be good news if they mean that investors are bringing the market to a bottom. How to not get mauled” by Ben Levisohn
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Most of us, casual market watchers, are probably wondering when stocks will hit the bottom. So far the S&P500, you know the index funds that Warren Buffet recommends for retail investors, has “fallen 18.7% from it’s January 3 all-time high.” Official bear territory is -20% and it hit that briefly on Friday. The NASDAQ already in a bear market slid 3.8% further this week to be off 28.2% from the January peak.
Spooking the markets this week were poor retail earnings, from Target and Walmart, and the FED continuing the dialog about raising interest rates. Walmart went further by suggesting that consumers are “finally feeling the impact of rising prices.” Consumer staples like Proctor and Gamble and Hershey fell as well by 7.7% and 8.4% respectively. From May 16th, SDPR S&P Retail ETF declined about 10%, NASDAQ declined about 4%, S&P500 and Dow declined about 2.5%. It is worrying that some of the best run companies, like Target and Walmart, are struggling currently due to “high inflation, supply-chain disruptions, a tight labor market, and rapidly shifting consumer preferences.”
Besides the fact that some of the best non-tech companies are struggling, are there other signs that the market is at or close to the bottom?
The P/E for the S&P500 once at 21.5 is now at 16.6 times forward earnings a level close to the “the long-run average.”
A measure of market sentiment, “the BofA Bull&Bear indicator,” is now in “unambiguous contartian buy territory.”
In contrast, others note that historically Bear markets have fallen further, an average of “-37.3%” and lasted longer “289 days.” Still others classify the market differently and suggest that “the current decline has been long enough but not deep enough.” According to Ed Clissold (Ned Davis) a turnaround will be suggested by selling pressure…[transitioning]...to persistent buying pressure.” Consistent strong demand has been a hallmark of this period setting it apart from other episodes of inflation.
In reality, according to Julian Emanual (Evercore ISI), “what investors don’t want to see is persistently strong retail sales or other signs that the FED will have to stay aggressive with rate hikes and quantitative easing.”
What will a true inflection point look like?
Says Frank Cappelleri (Instinet) there are few data points but “Previous long losing streaks…were followed by exceptionally strong rebounds…” The author, Ben Levisohn, remarks “We’ll be waiting.”