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.

 

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