S&P 500 nosedives into bear market territory, is it close to a bottom? – Stock Market News

Following Nasdaq’s fate, the S&P 500 stock index closed inside the bear market region last Monday for the first time since the outbreak of the Covid-19 pandemic in March 2020. In 2022, all major US indexes have experienced significant declines as high and sticky inflation, rising interest rates alongside increasing concerns over corporate profits and global economic growth have given a huge blow to investors’ risk appetite. As traders continue to re-evaluate their buy the dip strategies, which have failed to produce gains, the big question that lies ahead is where the ongoing downtrend will eventually reverse.

Barrage of negative developments drive S&P to bear market

In technical terms, a bear market is a 20% decline or more from recent highs, while it is also a psychological mark for investors that usually signals a recession. So far in 2022, we have seen extreme downside pressures being applied to stock markets, mainly due to the current macroeconomic environment.

Specifically, the persistently high inflation across the globe has increased markets’ expectations that central banks will be forced to tighten their monetary policies more aggressively. In turn, this would make it more difficult to achieve a ‘soft landing’, which is essentially the act of scaling down inflation without dampening economic growth to the extent that it causes a recession. Therefore, as the idea of an explosive cocktail of hot inflation and rising interest rates continues to rattle the markets, investors will be constantly turning more defensive, limiting their exposure to risky assets.

Up until now, loose financial conditions, the excess savings that people had accumulated during the lockdown era combined with the pent-up demand  enabled enterprises to post strong financial performance, putting a floor under their share prices. As the ‘easy money’ era has come to an end and inflation is showing no signs of peaking, consumer demand will be constantly deteriorating. That would translate into fewer revenue flows towards companies, which have already seen their profit margins getting squeezed from rising input and employment costs. Therefore, these recent developments could cast doubt on the resilience of corporate profits growth, further darkening the outlook for stocks.

What could save the day?

As inflation remains the name of the game both in the United States and the rest of the world, developments that would lead to inflationary pressures easing could revive stock markets. Firstly, an end to the Russian invasion of Ukraine would help energy prices to cool off. Energy constitutes a significant input cost for manufacturers and is an essential part of household spending.

Additionally, the complete emergence of the Chinese economy from the Covid-19-related curbs could prove beneficial in many ways as it would initially improve supply-chain disruptions, positively affecting the supply-side of inflation. Furthermore, the reopening of China's manufacturing facilities would lead to a rebound in its exports, which would eventually increase the supply of certain products in markets, driving their prices lower.

Has S&P 500 bottomed?

Taking a technical look at the S&P 500 index, we can observe that after trading sideways for a month the price has dropped below its 38.2% Fibonacci retracement of the upleg taken from the pandemic low of 2,191 and the all-time high of 4,818.

Should negative pressures resume, the index could dive towards the 50% Fibo of 3,505 before challenging the 61.8% Fibo of 3,195.

On the flipside, positive actions could help the price propel above the 38.2% Fibo of 3,815. Conquering this barricade, the bulls might aim for the 23.6% Fibo of 4,198, which has acted as a ceiling for the price in recent months.

Overall, the persistently hot inflation coupled with the Fed’s terminal rate being continuously revised higher appears to be negatively weighing on investors’ risk appetite as the probability of a recession keeps multiplying. For the bearish sentiment to alter, markets would need concrete evidence that inflation is indeed under control.


Latest News

Alibaba Q2 earnings: weak performance amid increasing challenges – Stock Market News

Energy giants set for record Q2 financial performance – Stock Market News

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.