Is the stock market bottoming out yet? Bank of America says 6 out of 10 signs say no

The S&P 500’s decline this year has dropped nearly 18% since January, but accelerated last week after Federal Reserve Chairman Jerome Powell suggested more “pain” was ahead.

Has the market bottomed out? Bank of America Research says no, based on a new list of 10 signals that the stock market has bottomed out.

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The bank made the list released Friday after analyzing “macro and bottom-up data, including policy, valuations, growth, sentiment and technical trends,” researchers said.

As of Friday, only 4 of the 10 criteria have been met. That means, at least according to Bank of America’s formula, we have six more hits before the market actually bottoms out.

Four indicators considered triggers include rising unemployment. The unemployment rate rose to 3.7% in August from 3.5% the previous month, according to the latest monthly employment data released on Friday. This is a relatively good sign in terms of lower inflation as it suggests the economy is slowing.

Additional positive indicators of market bottoms included the bear-to-bull ratio of major investors, whose sentiments tilted towards a more bearish outlook. Others have been multiple bear market gains of 5% or more (so far he has had two gains of 5% or more, according to the bank) and the Purchasing Managers Index (a major economic trend in manufacturing). directional indicator) is rising. Improved year-on-year.

But according to Bank of America, six out of ten signs are yet to turn in favor of a market recovery.

The Federal Reserve should start cutting interest rates. This shows that inflation is contained (indeed, the Federal Reserve is raising interest rates). Also, the equity risk premium, the excess return over the risk-free rate an investor expects to take on the incremental risk associated with the market, should increase by at least 75 basis points.

Additionally, the 2-year US Treasury yield should fall by more than 50 basis points from its all-time high. A useful tool for understanding the bond market, the yield curve needs to be steepened. The price/earnings ratio of the S&P 500 when added to the Consumer Price Index must be less than 20. There should also be a ‘buy’ signal within the Bank of America ‘sell-side indicator’ that tracks the strategist’s average stock allocation recommendation.

In Bank of America’s view, the market has more downside potential. Also, it’s unclear when all the rebound signals will change from red to green.

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