Will the Market Sell-off Drag S&P Index Lower This Week?
June 20 2022 - 4:37AM
Finscreener.org
On Friday, the S&P 500
index reported its 10th weekly
decline in the last 11 weeks and has now entered the bear market
territory. A bear market represents a pullback of over 20% in a
particular stock index from all-time highs.
Right now, the S&P 500
index has fallen 23.4% from record levels while the tech-heavy
Nasdaq Composite index has pulled back by 32%. Comparatively, the
Dow Jones Industrial Average index is down 18.3% in
2022.
Last week, the Federal Reserve
hiked interest rates by 0.75% which was the biggest increase since
1994. There is a good chance the central bank will remain
aggressive going forward given inflation numbers are still
elevated.
In an investor note, Ajay Singh
Kapur, equity strategist from Bank of
America (NYSE:
BAC) emphasized investors
should stop fighting the Fed and put an end to the buy-the-dip
mentality.
According to Kapur, “In a bear
market, heroism is punished. Valor is unnecessary, and cowardice is
called for in portfolio construction — that is the way to preserve
capital and live to fight another day, waiting for the next central
bank panic, and better valuations and a new earnings
upcycle.”
Technology stocks have been
pummeled as they are sensitive to interest rate hikes.
Additionally, cyclical stocks in the airlines and cruise lines
sector have also underperformed in recent months.
The equity market sell-off has
driven cryptocurrencies lower as Bitcoin slumped over 30% in the
last week. Right now, the BTC token is trading at $19,700 after
briefly slumping to below $18,000. As interest rates have risen,
investors are shifting capital towards lower-risk assets such as
bonds.
While stock market indices
rallied on Wednesday after the Fed’s announcement, the optimism was
quickly reversed the following day. Several experts believe market
sentiments to be subdued resulting in another round of sell-off in
the upcoming week.
Is a recession on the horizon?
A hawkish stance by the Fed and a
challenging macro environment might lead to an economic recession
in 2023. Higher bond yields are already pushing housing stats lower
while consumer sentiment is also near record lows. Rising oil
prices and lay-offs at tech companies have added to the pessimism
surrounding the stock market.
Bank of America’s global
economist, Ethan Harris emphasized the U.S. economy is one revision
away from a recession. Harris stated, “Our worst fears around the
Fed have been confirmed: they fell way behind the curve and are now
playing a dangerous game of catch up. We look for GDP growth to
slow to almost zero, inflation to settle at around 3% and the Fed
to hike rates above 4%.”
According to
JPMorgan (NYSE:
JPM), there is a 63%
chance of a recession in the next two years and an 81% chance for a
recession to occur within the next three years.
ItU+02019s quite evident that the
Federal Reserve is willing to risk the possibility of a recession
in order to lower inflation to reasonable levels.
The upcoming week is relatively
light in terms of economic events as the U.S. markets will be
closed on Monday. Investors will be provided with insights into the
U.S. economy as stocks such as FedEx
(NYSE:
FDX) and
Lennar (NYSE:
LEN) will be reporting
earnings this week.
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