The stock market slump could continue as the dollar strengthens as Wall Street awaits Fed Chairman Jerome Powell’s speech later this week and concerns about inflation and a slower economy mount.
US stocks dropped sharply to start the week on Aug. 22, with the S&P 500 down 2.14% and the Nasdaq down 2.55%. Gold and oil prices also fell. The S&P 500’s plunge was the biggest in two months.
S&P 500 falls again
The market’s four-week winning streak ended last week as investors became more defensive and geared up for slower economic growth. The stock market could take deeper losses if the S&P fails to break above its 200-day moving average, Scott Minerd, Guggenheim’s global chief investment officer, said in a blog post.
Stocks have rallied since the Fed’s June meeting and further market declines could follow as investors grow increasingly pessimistic as the odds of a recession increase.
The current rally “has failed to break the downtrend that has been in place since the beginning of the year,” he wrote.
The 200-day moving average is an important indicator to watch out for because in May 2008 the market rebounded slightly below the average.
Stocks then plummeted with the S&P 500 falling another 53% before hitting bottom in March 2009, “bringing the decline from peak to bottom to 57%,” Minerd said.
Failure to reach the 200-day moving average was also a critical point during the 2000-2002 bear market.
The two-year period “saw several failed escape attempts that eventually resolved into a 49% decline from peak to valley,” he said. “It is also worth noting that the downtrend was not broken in any of these episodes.”
Growth stocks face challenging times
A handful of sectors, energy and defensive stocks such as consumer staples and utilities are the only ones holding gains at their respective 200-day moving averages on Aug.
Growth stocks face several headwinds, although these sectors have led the recovery since June.
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They remain “below this key technical threshold, indicating that more problems could arise for growth stocks if the rally is not sustained,” Minerd said.
Waiting for the Fed’s Next Move
The market is going through a “digestion phase, triggered by weaker-than-expected economic reports and anxiety over the political statements and indications set to emerge from the Jackson Hole Economic Symposium,” said Sam Stovall, chief investment strategist at CFRA. Research.
The Fed’s rate path, part of its strategy to reduce inflation, remains complicated. Sentiment that the Fed would raise rates again by 75 basis points in September fell. Investors are on both sides of the fence – the stakes on a 50 basis point move are at 49.5% and the odds of a 75 basis point increase are at 50.5% ahead of Powell’s speech at the symposium. Jackson Hole later this week.
The market is approaching a crossroads, according to Lowry Research, a CFRA company.
The breadth of the market “will likely be the key to the final inflection point in identifying a new sustainable uptrend,” Stovall said.
“New records in Lowry’s market breadth indicators, ideally accompanied by increasing volume, would help confirm a new bull market,” he said. “But a failure of overbought levels, accompanied by evidence of heavy selling, would increase the odds of a renewed decline or test of the June low.”
The coming weeks may shed more light for investors on which strategy to adopt for the next two quarters.
“The coming weeks will determine whether investors are advised to continue to gradually take the advance, which will likely last many months, or prepare for the next leg of a long-term decline,” Stovall said.
If a recession occurs, investors should expect earnings estimates to be lowered, Minerd said. “Equity analysts’ expectations of earnings per share have already dropped slightly since June.
“On a fundamental level, Federal Reserve officials seem determined to reduce inflation by causing a recession,” he said. “A cyclical decline in price/earnings ratios will likely combine to drive stocks to new lows before this bear market ends.”