Sep 26, 2022 7:00 PM +05:00
VOT Research Desk
Investor’s Considerations – Analytics
Stock market plunged into a doomsday spiral last week as a result of a hawkish Federal Reserve that crushed any lingering optimism among investors.
Before the most recent Fed meeting, stocks were expected to price in the majority of the bad news. Now, those hopes have been dashed.
Since midday Wednesday, when the central bank raised rates by three-quarters of a percentage point and indicated that a more aggressive pace of hikes than anticipated is on the horizon, the S&P 500 Index has lost more than 4%.
Traders are paying more for protection against short-term gyrations in the S&P 500 than they are for long-term swings, a sign of uncertainty regarding the direction stocks are heading for the first time since June.
In the meantime, a similar pessimistic message is conveyed by a series of estimate reductions from Wall Street analysts.
For example, strategists at Goldman Sachs Group Inc. cut their year-end forecast for the broad equity benchmark to a level that implies a 2.5% decline from Friday’s close. Strategists stated that additional suffering may be imminent.
This year’s uncomfortable drop in the stock market likely isn’t over soon.”Until inflation significantly decreases, a heavy cloud will continue to hang over stocks in the coming weeks and months.
The following is the clear message that was conveyed during Fed Chair Jerome Powell’s press conference on Wednesday: The fight to control inflation will cause real harm to the economy. Now, bets are mounting that it will exacerbate the situation for stocks even more. Through mid-August, the yield on two-year Treasuries reached its highest level since 2007 after the S&P 500 nearly erased its two-month rebound on Friday. In four of the last five weeks, stocks have lost at least 3%.
The CBOE Volatility Index, or VIX, briefly surpassed 32 on Friday for the first time since June, signaling a return to volatility.
The VIX’s front-month futures contracts are trading 0.7 volatility points higher than the second-month futures, creating an “inverted volatility curve” that typically indicates increased investor apprehension.
Goldman Sachs strategists have lowered the S&P 500 price-earnings ratio from 18 times to 15 times, which they consider to be fair when rates rise faster than anticipated. To reflect this, the bank decreased its year-end S&P 500 view by 700 points to 3,600.
The S&P 500 has suffered severely from bear markets that have occurred during full-blown recessions. In the nine previous bear markets that have occurred since World War II, the S&P 500 has experienced an average decline of 35%.According to Sam Stovall, chief investment strategist at CFRA, if the benchmark falls below its June low of 3,666.77 (the S&P 500 closed 0.7% above that level on Friday), a similar scenario could occur once more.
According to him, a 14.9 valuation multiple (based on a $215 forward per-share profit estimate) is implied if it breaches that level, which would mean a 33% decline from the record high.
Stovall stated in an interview, “This will be a bear market accompanied by a recession, but I don’t think we’re headed for a mega meltdown.”Before the final low is established, it may be necessary to wait until the first quarter of 2023.
Naturally, factors that long-term bulls can rely on are also being produced by the bearish environment.
According to data compiled by Ned David Research, stocks have entered their third-longest period of extreme pessimism dating back to 1995.The S&P 500, on the other hand, has averaged a 20% gain in the year that has followed previous bearish streaks.
Long-term optimism is bolstered by the expectation that the Federal Reserve will be able to ease up sooner if it raises interest rates sufficiently to combat inflation.
These are the opportunities that we wait for to buy stocks at favorable prices for long-term investors.
