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So far, late 2021 and early 2022 has conjured up a fairly unique cocktail of market conditions that has seen global stock markets struggle to turn a corner on its crippling downturns. Can investors expect to see a change in fortune soon? Or will the year play host to a long-term bear market?
So far, 2022 has seen the Nasdaq Composite index fall 18.7% at the time of writing, whilst the Dow Jones has shed 7.29% in the year to date – owing to a range of testing factors throughout the market.
The past two years have been heavily disrupted by the Covid-19 pandemic, and the market briefly crashed when the severity of the health crisis became known and nations were forced to impose lockdown measures that affected virtually every industry on the planet.
However, investor fears soon gave way to a period of market prosperity, as businesses underwent digital transformation at a rapid pace as a means of finding customers online. Tech stocks rallied as a result and demand was so much stronger than expected that a global computer chip issue began to impact supply chains.
This combination of fresh consumer demand and supply chain issues also prompted the rise of inflation rates throughout many global economies to levels that haven’t been seen for many decades. As the value of domestic currencies fell, many of the tech stocks that enjoyed a strong end to 2020 and beginning of 2021 began to undergo a correction – which led to more investor fears and more widespread stock sell-offs.
Finally, the recent flare up of geopolitical tensions surrounding Russia’s invasion of Ukraine has paved the way for unprecedented levels of sanctions imposed against the country in the west and further market volatility as investors exit markets to take up positions in safe haven assets like gold.
Using the Invesco QQQ Trust Series 1 index as a benchmark, which tracks the Nasdaq’s top 100 stocks, we can see that the US market’s leading stocks have dwindled further in 2022, although early signs of a reversal of fortunes may be forming as the world continues to move away from the Covid-19 pandemic.
So, when can investors expect to see the stocks they’re holding make a comeback? And could tech stocks return from spending time underwater in 2022?
Is the bottom already in?
Charting when stocks will recover can be a difficult task due to the far-reaching ramifications of the circumstances that caused companies to struggle. For instance, one of hardest struck stocks during the recent downturn has been Netflix (NASDAQ: NFLX), which is currently more than 66% down in 2022 alone due to growing competition and the loss of 700,000 customers after ceasing operations in Russia.
Although this means that some stocks will recover at a different rate than others, according to Fundstrat’s Tom Lee, there’s around an 88% probability that the broader stock market has already bottomed in 2022 as stocks fell on the impact of Russia’s invasion of Ukraine on the 24th February.
Lee reasons that, provided the US economy can sidestep the prospect of a recession in 2022, the S&P 500 could recover to around 5,100 by the end of the year – representing an upside of around 24% from the lows of 4,114 posted on the 24th February.
“We think lows for 2022 are in with >88% probability, but we still see stocks in a ‘jagged’ recovery in 1H2022. Full risk-on coming in 2H2022, where the S&P 500 can exceed 5,100 before year-end,” Lee told Markets Insider.
It’s also worth noting that, despite an extraordinary combination of impactful events, the S&P 500 is still in a better position today than it was at the same stage in 2021. Despite being around 10% lower than the beginning of 2022, as headwinds ease we could see momentum gather quickly.
The road to recovery
So how is the market most likely to recover from its recent lows? Maxim Manturov, head of investment advice at Freedom Finance Europe believes that:
“Against a backdrop of continuing global commodity price volatility affecting the world’s biggest economies, a quick recovery is foggy. The US is still struggling to resolve its oil shortage. Strategic oil stocks in the USA are falling to their lowest level since December 2001, with a three-month change of minus 38 million barrels. Stocks have never fallen like this! Oil production is recovering very slowly (in December 2021 at 11.8 mln b/d, currently at 11.9 mln b/d). In the European market all is not rosy either, no matter what is being done. Inflation is rising, Europe’s biggest industrial clusters are declining, industry in Germany (-4.8%) and France (-4.6%). Pan-European industry is weak +2.8%.
When it comes to the pace of recovery, we should not forget geopolitical tensions (sanctions), rising interest rates, which is slowing down positive economic processes. As soon as supply chains start to recover, geopolitical tensions (sanctions) are reduced and the commodity market stabilises, we can talk about an immediate market recovery.”
“The financial sector could be interesting due to QE cuts, expected rate hikes and economic growth ahead could be good times for the sector. Plus, financials offer inflation-protected returns. There is also the large technology sector or FAANG segment, which looks extremely attractive after the correction, retaining fundamental upside potential.”
Following two years of the Covid-19 pandemic, 2022 appeared set to herald the era of the ‘new normal’, and a stock market recovery from the volatility experienced following the emergence of the pandemic. However, complications caused by the health crisis have been compounded by Russia’s invasion of Ukraine, leading to further uncertainty.
Although it’s perhaps more difficult than ever to anticipate the market’s movements over the coming weeks and months, investors may begin seeing more promising signs that can help to bring back confidence in stocks and shares. The road to recovery may be a long one, but it may have already begun.
