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  • Writer's pictureAntonise De Wet

The S&P 500: 2 month rally - What is next?

The benchmark S&P 500 index of US stocks officially entered "bear market" territory in June 2022. This represents a drop of more than 20% from the index's peak value. The technology-heavy NASDAQ Composite Index (which comprises over 3,000 common securities) and the small-cap Russell 2000 Index have both undergone bear markets in 2022. Such stock market downturns occur on a regular basis and for a variety of reasons. Sometimes the adjustments are due to inflated market values following a long bull market. In other cases, they may be the result of external events that outweigh other fundamental factors that have traditionally driven stock market performance.

"The market's decline this year can be ascribed to investors' increasing level of uncertainty," says Rob Haworth, senior investment strategy director at US Bank. The environment was influenced by three major events: chronically high inflation, a sudden shift in monetary policy by the Federal Reserve, and the economic consequences from Russia's invasion of Ukraine.

After rebounding in July from their June lows, key indices began to fall again in August, reaching new lows in September as investor fears of a recession increased. Stocks recovered strongly in October, but market volatility remains a feature of today's financial environment. The S&P 500 was down roughly 18% through October (total return).

The S&P 500 gained for the second month in a row in November, as investors became more confident that the Federal Reserve would deliver a smaller rate hike in December. The benchmark US index rose 5.4% in the month, including a 3.1% surge in the final session fueled by Fed Chair Jerome Powell's dovish remarks. "The time for reducing the pace of rate rises may come as soon as the December meeting," Powell said in a speech at the Brookings Institution on Nov. 30. He also stated that the central bank would "keep the course until the task is done." Despite the two-month bounce, the S&P 500 is still down about 15% year to date, on pace for its worst annual return since 2008, the year of the global financial crisis.

Nonetheless, investors are confident that the stock market will maintain its bullish year-end momentum into December, which has traditionally been one of the strongest months of the year for the S&P 500.

Stocks are still vulnerable

Fed money tightening and increasing inflation have kept the stock market volatile for the most of 2022. The stock market's performance has fluctuated dramatically from month to month. Market fundamentals, such as business sales and earnings, will be an additional source of concern in the future. "A significant concern now is whether increased wage expenditures are affecting companies' bottom lines," says Haworth. "Companies have been able to maintain earnings levels to date because they have been able to drive through pricing rises," Haworth explains. "Can they keep doing that?" It will reveal a lot about how earnings perform throughout the year."

American Recession Watch

The Fed is at a turning point in its fight against inflation, and the coming months will determine whether it can steer the U.S. economy toward a "soft landing," that is, control inflation without igniting a recession. The U.S. housing market has dramatically weakened recently, while manufacturing output has decreased. Investors are growing more anxious that a recession might be approaching as consumer confidence is deteriorating. The tenacity of the U.S. labor market has thus far been the most persuasive proof that a soft landing may be feasible. In October, the U.S. economy added 261,000 jobs, more than the 205,000 jobs predicted by economists, according to the Labor Department.

What to look out for in 2023:

It's that time of year again, when Wall Street's best strategists tell customers where they think the stock market will go in the coming year. Typically, the group's average projection forecasts the S&P 500 rising by around 10%, which is consistent with historical trends. This time, the experts are especially cautious, with most anticipating the S&P to conclude 2023 lower than it is now. With these strategists' forecast comes hundreds of pages of study and analysis. The overarching themes: Most Wall Street organizations predict that the US economy will enter a recession in 2023. Many believe that there is still opportunity for downward revisions to the 2023 profit projections, which they predict would result in significant stock market volatility in the first half of the year. At the same time, many predict a clear decline in inflation, which would allow the Federal Reserve to loosen up on its aggressive stance on monetary policy. At least some experts believe the Fed may start decreasing interest rates again if the economy drastically worsens. Important things to pay attention to:

What key elements are at play that might affect when the stock market recovers?

  • The Fed's policy responses to inflation.

  • Trends in both consumer and business spending.

  • COVID-19.

  • Effects of the Russia-Ukraine conflict


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