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When Will Wall Street Stop Falling?

By ActivTrades (Carolane de Palmas)Market OverviewJul 04, 2022 06:30
uk.investing.com/analysis/when-will-wall-street-stop-falling-200525319
When Will Wall Street Stop Falling?
By ActivTrades (Carolane de Palmas)   |  Jul 04, 2022 06:30
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Although Wall Street ended the week higher on Friday, American indices still ended the week in the red as recession worries grow. This is the worst first half of a year for the Dow Jones and the S&P 500 since 1962 and 1970, respectively, and it is the most significant half-year fall for the January to June period for the Nasdaq. Many investors and analysts are therefore wondering how far Wall Street will keep falling...

Summing up the first half of 2022

Investors have experienced something of a rollercoaster ride since the close of 2021 and the first half of 2022. Both stocks and bonds have overall seen steep losses this year, which seems to have pushed many investors to the sidelines. Volatility has been sky-high on the back of worrying levels of inflation - now at a forty-year high, and interest rates are on the rise again as a result.

In the first half of the year, the S&P 500 fell 21%, losing $8.5 trillion in market value. The index arrived at the common definition of a bear market in June with a more than 20% loss of the peak value of the index, confirming its worst first-half figures since the 1970’s. The Dow Jones similarly continued its downward streak, shedding more than 15% of its value. The Nasdaq is down almost 30% during the first semester of 2022 as well, its worst performance on record for a first half of a year.

Because of these worrying trends and the fact that the Gross Domestic Product (GDP) fell by 1.6% in the first quarter of 2022 (compared to the 5.7% increase in 2021), investors' fears of a recession (two consecutive quarters of negative GDP growth) and/or stagflation (long-term inflation, slow economic growth, and layoffs) happening in the near future are intensifying.

While all eyes are on the Fed’s GDP tracker for a hint of the second-quarter numbers, the Atlanta Fed GDP Now tracker is modeling a further 2.1% decline, remembering that the first official estimate won’t be released by the U.S. Bureau of Economic Analysis until July 6th.

Historically speaking, bear markets are generally shorter in duration than bull markets, but it’s anyone’s guess as to how long it will take to rebound and just how low the market will fall before that happens...

What’s driving the dip?
The drivers of a downturn are often more easily analyzed in hindsight, but the market has had serious whiplash this year, with several factors causing investors to go into a depressive panic mode.

Globally rising fuel prices, supply chain issues as a result of China’s prolonged COVID lockdown strategies, geopolitical tensions in Europe, the ongoing conflict in Ukraine, and the trillions of dollars that were pumped into the economy as a means to combat the pandemic are all contributors to the current market conditions.

With inflation also running rampant and now the resulting hike in interest rates to follow, it’s surely the perfect recipe for market turmoil.

We may not be totally out of the woods yet either, as demand for domestic purchases and services is still backlogged and outstripping supply - a classic indicator of an inflationary environment and the possibility of further increasing prices to come. These increasing prices then reduce purchasing power and then the inevitable economic growth slowdown ensues.

Some experts are predicting that this current fall in the market might all hinge on the Fed’s ability to get inflation under control, and the assertion from Fed Chairman Jerome Powell before Congress last week that the Fed is "strongly committed" to bringing down inflation might be warmly received by some investors, while others might be worried about the Fed's monetary policy consequences on growth.

Rates have just been hiked by the biggest jump since 1994 in June, a 0.75 percentage point jump, which was not totally unexpected as it was priced in by the market ahead of time, and some were even talking about a 100 basis points bump. But as the Fed attempts to get a grip on inflation, many investors and analysts worry that if the interest rate rises continue, it may push the country into recession. This is all a delicate balancing act for the Fed to manage, and timing will be everything.

What should I expect for the future of my US portfolio?

Historically speaking, bear markets never last as long as bull markets, and many are on the lookout for when things will start to improve. Some experts are more optimistic than others, but most agree that we could see some improvement by the end of the year.

Leading European financial services group, Société Générale (SocGen), suggests that the market will bottom out towards the end of 2022 as tighter monetary policy might cause stagflation.

Solomon Tadesse, head of North American Quant Strategies at SocGen, predicted the S&P 500 will fall another 22% to around 3,020 points in a study of the last 150 years of bear markets.



He commented that the current selloff was “an inevitable needed correction of the post-covid excesses” referencing the conditions that were created by enormous stimulus injections that the Fed introduced after the lows of March 2020.

Bank of America chief strategist, Michael Hartnett, also commented in a Sunday note that over the past 19 bear markets, the average peak to trough decline has a duration of 289 days, putting this current bear market’s end in October this year with the S&P at around 3,000 points.

Despite the potentially painful outlook for the next few months to half a year, one thing is generally for certain during downturns in the market - when things do eventually rebound, there will be new highs to follow.

It’s important to remember to think of your long-term goals as an investor and stay level-headed. Investments in the stock markets typically outpace inflation over time regardless of the ups and downs of the market, so if you have the time, and the ability to stay the course and find ways of taking advantage of the cheaper prices, conditions will only improve with time.

When Will Wall Street Stop Falling?
 

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When Will Wall Street Stop Falling?

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Comments (6)
Alan Lynch
Alan Lynch Jul 05, 2022 18:05
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It hasn’t even started yet. We will look back at these times like the great depression of 1929. Dow going to 20,000.
Vladimirovich Vladimir
Vladimirovich Vladimir Jul 04, 2022 22:50
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Think we’re already in the vicious spiral. Production lacking since start of covid, spiraled prices, now labor spiral ongoing…cant wait to see the showdown. 🤣
John Williams
John Williams Jul 04, 2022 19:08
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When peace is sought with China and Russia
Xerpman liopn
Xerpman liopn Jul 04, 2022 11:04
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hello
Stephen Hunter
Stephen Hunter Jul 04, 2022 8:16
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Using interest rates to try and control inflation isn't working the way it did in the past. Energy and supply chain inputs to inflation combined with years of money printing are the main reasons.
Mareks Boriss
Mareks Boriss Jul 04, 2022 7:21
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Nice one...
 
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