Stock market bottom still elusive despite growing pullback

US stocks are in the midst of their longest selling in decades.

Whether they are close to the bottom is anyone’s guess.

The market sell-off has always astounded strategists trying to predict when they are nearing completion. Some concluded that panic selling erupted. Others, such as the one that ran from 1973 to 1974, ended days after Weak trading volumes.

Many investors and analysts who look at historical pullbacks believe that the current recession that has put the S&P 500 on the cusp of a bear market still has a way to go.

The index is down 19% from the record set on January 3, and is joking with a 20% drop that would end a bull market that began in March 2020. The sell-off in shares this year, now in its fifth month, has lasted much longer than The typical pullback that occurs without a recession, according to Deutsche Bank.

However, the Fed is still in the early stages of its campaign to raise interest rates, which means that financial conditions will tighten further and put more pressure on stocks in the coming months. Many people are skeptical that the central bank will be able to continue raising interest rates without pushing the economy into recession, a period during which stocks have typically fallen by about 30% since 1929, according to Dow Jones market data.

The data continued to indicate that this year’s sell-off, while painful, has not yet led to the kind of shifts in investment behavior seen in previous recessions.

Investors continue to own a large portion of their portfolios in the stock market.

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Bank of America Corp.

He said this month that his private clients own an average of 63% of their portfolios dedicated to equities — far more than they did after the 2008 financial crisis, when they had just 39% of their portfolios in equities.

The gauge of expected market volatility remained below the levels it broke during the previous sell-off. The Cboe Volatility Index, or VIX, jumped above 40 during the sell-off in March 2020, November 2008 and August 2011. It has yet to close above that level this year.

Investors are not rushing out of some of the hardest-hit parts of the market. The ARK Innovation exchange-traded fund has attracted net inflows of $1.4 billion this year, despite being on track to post the worst returns in its history, according to FactSet. Leveraged ETFs that offer investors a way to amplify bullish bets on the Nasdaq-100, as well as semiconductor stocks, have attracted billions of dollars in inflows this year.

“We still need to get the foam out of the markets,” said Cole Smead, president and portfolio manager of Smed Capital Management.

Like many other investors, Mr. Smead has been trying to identify companies with attractive valuations that he believes can withstand rising inflation and slowing growth. One company Mr. Smed was looking forward to

Starbucks Corporation.

, which the company previously owns. But like everything else in the stock market, shares of the coffee chain have fallen this year.

Starbucks shares are down 37%, on course for their worst year since 2008. The S&P 500 is down 18% for the year and posted its seventh straight weekly loss Friday — the longest streak since 2001.

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“Things will get worse before they get better,” Mr. Smed said.

One reason why so many investors are cautious right now? High rates of inflation. The Federal Reserve is raising interest rates in an effort to rein in inflation, which rose earlier this year at the fastest pace since the 1980s. It aims to achieve a “soft landing” – in other words, slow the economy enough to rein in inflation but avoid pushing the US into recession.

Many investors fear that the central bank will not succeed, based on previous cycles of monetary tightening.

Back in the 1980s, the United States slipped into recession four of the six times the Federal Reserve launched campaigns to raise interest rates, according to research from the St. Louis Fed. This time, the central bank faces the added challenge of trying to control price increases, while Russia’s invasion of Ukraine and China’s non-spreading coronavirus policy are adding to supply chain disruptions and inflationary pressures around the world.

“There is no chance in hell that the Fed will be able to crush inflation without significantly weakening domestic demand,” said David Rosenberg, president and chief economist at Rosenberg Research.

Mr. Rosenberg added that he believes markets will have a hard time finding an ultimate bottom before the Federal Reserve either tightens monetary policy, or convinces investors that it is succeeding in lowering inflationary pressures without risking a recession.

Others note that stock declines, while painful, have not yet reached the severity of previous bear markets yet.

Back in 1929, the S&P 500 fell an average of 36% during a bear market, according to data from Ned Davis Research.

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Mr. Smead said the end of the sale would be “a great buying opportunity, but I don’t think this moment will necessarily be here tomorrow”.

Write to Akane Otani at [email protected]

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