Analysis: S&P 500 bear market whispers grow louder as US stocks slide continues

NEW YORK, May 9 (Reuters) – Expectations of a hawkish Federal Reserve are clouding Wall Street’s outlook for stocks, with some investors now bracing for a potential bear market in the benchmark S&P 500 index.

A bear market, often thought of as a drop of 20% or more from a peak, would mark the end of the pandemic-era rally that sent stocks to record highs thanks to unprecedented stimulus from the Federal Reserve.

After falling 2.5% on Monday, the S&P 500 was recently about 16% below its peak reached on January 3, while going through the worst start to four months of a year since 1939. The Nasdaq Composite Index (.IXIC) hit bear market territory in March and is down nearly 26%.

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Although a bear market is not a foregone conclusion, signs of sour sentiment are everywhere as the Fed tightens monetary policy to combat the worst inflation in nearly four decades.

U.S. equity mutual funds and exchange-traded funds posted outflows of $37 billion in the past four weeks, the largest four-week total since the end of 2018, according to Goldman Sachs. In April, analysts at Deutsche Bank forecast a recession accompanied by a 20% drop in the S&P 500 in 2023, while strategists at BofA Global Research last week warned of a “rate shock,” predicting the current slide of the shares will continue.

Bearish sentiment in a weekly survey by the American Association of Individual Investors stood at 52.9% for the week ending May 4, well above the 30.5% average rating, while the survey of managers BofA’s fund manager last month showed optimism about overall global growth. -Low time.

“The Fed has been slower than ever to respond to inflation, and that’s leaving me seriously negative on stocks,” said David Wright, co-founder of Sierra Investments, a $9.6 billion asset manager.

Wright sees some parallels in the currency’s economic scenario with 1981, when high inflation forced the Federal Reserve to embark on a series of aggressive rate hikes, pushing the economy into recession. He has cut his stock holdings and is moving into municipal bonds in preparation for a months-long bear market.

The Federal Reserve announced a 50 basis point rate hike last week and said it will raise rates by 50 basis points at its next two meetings. Investors are currently pricing in a full 209 basis points in tightening this year, putting the central bank on track for its most aggressive tightening path since 1994.

Sameer Samana, senior global market strategist at Wells Fargo, said the S&P 500 has a one in three chance of falling into a bear market if it falls below what he saw as a technical support level of 4100, one level below which fell on Monday.

John Lynch, chief investment officer at Comerica Wealth Management, believes the furious 115% rally that stocks saw from their COVID-19 lows leaves them vulnerable to a sustained decline.

“It is conceivable that the S&P 500 needs to establish a bottom” that will lead it into a bear market, given that the index hit a new 70 high last year without more than a 5% retracement, he wrote on Friday.

Overall, there have been 14 bear markets since 1945, with stocks losing an average of 36% over 289 days, according to data from Hartford Funds.

While not all bear markets have coincided with recessions, every recession since 1968 has triggered a bear market, according to data from CFRA Research. Analysts at Goldman Sachs recently estimated the chances of a recession in the coming year at 35%.

Not all strategists see sustained losses ahead.

Credit Suisse’s Jonathan Golub lowered his year-end price target for the S&P 500 to 4,900 from 5,200 last week, a move that would imply a gain of nearly 22% from the index’s current level and a gain of roughly 3%. % For the year. .

Analysts at Truist Advisory Services lowered their market targets last month, but they haven’t turned more negative in the most recent drop, Keith Lerner, the firm’s co-chief investment officer, wrote.

“There has been a pretty good reset in valuations and investor expectations, and a high degree of Fed tightening is already priced into the market,” he wrote.

Others, however, believe that the Fed’s hyperfocus on inflation makes a recession more likely and will continue to weigh on stocks.

“Inflation means the Fed needs to tighten until it breaks the economy or the market,” said Michael Harnett, chief investment strategist at Bank of America. “Until it does, asset prices need to come back down.”

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Reporting by David Randall Editing by Nick Zieminski

Our standards: the Thomson Reuters Trust Principles.

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