Indicators show US stocks could fall further

New York stocks were down all year. The Nasdaq, which is down nearly 25% in 2022, is down. The S&P 500 is on a six-week losing streak and about 16% below its all-time high. But could stocks still have much more room to fall?

Some would argue that the brief Covid-19-induced bear market in spring 2020 (in the Northern Hemisphere) did little to change investor sentiment.

In fact, the generous pandemic stimulus may have made the speculative craze even worse. It seems that many people used some of the government money to trade meme stocks, cryptocurrencies and other risky investments.

But stocks in companies like GameStop and AMC, as well as bitcoin and other cryptos, were crushed in 2022.

THE CNN Business Fear & Greed Index which analyzes seven measures of market sentiment, has been showing signs of extreme fear over the past week.

Despite this, the broader market may not yet have reached the proverbial capitulation point, the pervasive sentiment of surrender among investors that often signals a bottom. After all, the S&P 500 is still trading around 20% above pre-pandemic levels.

More sales could be on the cards before the bear market runs its course

Therefore, stocks could fall much further before the market finally bottoms out, especially as the Federal Reserve, the US central bank, seems intent on raising interest rates more aggressively to fight inflation – no. matter what happens to the stocks.

“The current combination of an exceptionally strong job market and excessively high inflation makes the Fed more likely to stay the course on rate hikes — even if the S&P 500 falls into bear market territory,” said Gavin Stephens, managing director. portfolio of Goelzer Gestão de Investimentos, in an email.

“History shows that the Fed will tolerate large drops in stock prices if conditions warrant. Those conditions are in effect today, which means we shouldn’t expect the Fed to come to the rescue of the stock market at this point,” he added.

The good news for investors is that stocks are now much cheaper than they were before this year’s market crash. According to data from FactSet, the S&P 500 is trading at about 16.6 times earnings estimates for this year. This is below the five- and ten-year averages for the index.

But stocks can be “cheap” for good reason. First-quarter earnings were up only about 9% from a year ago, the slowest growth rate since the fourth quarter of 2020.

Profit growth is expected to decline further in the short term. Profits are expected to rise just 4.4% in the second quarter, according to FactSet. And more Fed rate hikes will affect profits.

“It doesn’t feel like it’s time to call the fund yet,” Christopher Smart, chief global strategist and head of the Barings Investment Institute, said in a report. “Until markets gain comfort in the path of long-term rates, investors will not be able to agree on a definition of what is cheap.”

That said, trying to know when the market bottomed – or peaked – can be a silly task. Many experts argue that investors with diversified portfolios will be better off if they don’t panic.

“You can miss out on the best rebounds if you stop investing because of a potential downturn. You run the risk of the market going up while you wait on the sidelines,” said Tony Molina, Wealthfront product evangelist.

“It’s important to remember that volatility is a normal part of investing, and you don’t lose money unless you sell your investments for less than you paid for them,” he added.

“History shows that markets tend to rally over the long term, which means that if you follow a diversified strategy and keep investing, you are likely to come out ahead.”

In other words, storm clouds may not yet be ready to part with stockpiles. But just as rainy days eventually give way to sunshine, patient investors can count on another bull run in the market once that volatility subsides.