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‘Psychology has changed very quickly’: Why stock market lows could be retested as the S&P 500 enters its weakest period of the year

With summer ending, US stock markets are bracing for a potentially volatile downturn.

“Recession fears are most likely to retest June lows,” Ed Crisold, chief U.S. strategist at Ned Davis Research, said in an Aug. 31 note. “In light of seasonality, retesting may occur in the coming weeks.”

According to the note, history shows the S&P 500 index faces its weakest period of the year as US investors return from the long Labor Day weekend. From September 6th to October 25th.

Ned Davis Research Report August 31, 2022

Stock markets are already shaking.

The US stock market closed sharply lower on Friday, with all three major benchmarks falling for the third consecutive week. Still, the S&P 500 SPX,
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It closed 7% above its 52-week low of 3,666.77 on June 16, according to Dow Jones Market Data.

“I think we need to get back to that level and test it,” Bob Dole, chief investment officer at Crossmark Global Investments, said in a phone interview. “We don’t see a big drop,” he said.

read: ‘Prepare for an epic finale’: Jeremy Grantham warns of ‘tragedy’ looming as ‘superbubble’ could burst

Meanwhile, according to a memo by Ned Davis, the US Federal Reserve (Fed) has retested this year’s stock market lows as it continues to raise interest rates to combat sharp inflation as the US economy slows. The prospect of a recession is increasing, along with the prospect of a recession. A retest is more likely this year as the Fed is “committed to removing liquidity from the financial system,” wrote Crisold.

Vanguard Group said in a Sept. 1 report that it had cut its forecast for US economic growth this year after two consecutive quarters of contraction. The company now expects economic growth for the full year of 2022 to range from 0.25% to 0.75%, down from last month’s forecast of about 1.5%.

“We believe the U.S. is likely to struggle to return to above-trend growth in the coming quarters,” Vanguard said. “The likelihood of a US recession is about 25% in the next 12 months, and the next 24 months he expects to be at 65%.”

According to Ned Davis, a short “retest” of stock market lows may depend on whether the US manages to avoid a recession.

“The average non-recession bear market lasts about seven months and is down 25% (-18% over the past half-century),” Crisold said in a note to Ned Davis. The decline is consistent with the classic case.” “Conversely, the average recession bear lasted about a year (he’s 17 months in the last 50 years), and on average he’s down 35%.”

Inflation “Dragon”

After Chairman Jerome Powell sent a clear message in his Jackson Hole speech on Aug. I was hoping for another big rate hike. Even if it means some pain for homes and businesses.

Stocks swooned on his remarks that day, along with the Dow Jones Industrial Average DJIA.
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We finished 1,000 points and our losses have deepened since then.

Crossmark’s Doll said the “strong” rise in stock prices seen earlier in the summer reflected “over-optimism given the early stages of the fight against inflation”. Dollar believes inflation has peaked, but this year’s continued decline is an anomaly, and in 2022 he said he was likely above the Fed’s 2% target. I am predicting.

“It’s not going to be like, ‘Okay, I got that dragon, what’s next,'” he said. Inflation, which was 9.1% in June based on the consumer price index, if it falls to 4% or 5%, “that’s good news, but not good enough to say the Fed is over,” Dole said. said Mr.

The Fed expects to raise the federal funds rate target from near zero in early 2022 to a range of 3.25% to 3.75% by the end of the year, according to a Vanguard memo. This compares with the current he ranges from 2.25% to 2.5%.

Ahead of Powell’s Jackson Hole speech, the market narrative had shifted from tales of the Fed fighting inflation through aggressive rate hikes to ‘when to pivot’. Interactive Brokers chief strategist Steve Sosnick said: But Powell returned his focus to the Fed’s unfinished fight against monetary tightening and inflation in a relatively short, “unambiguous” speech, sending “a very powerful message to the markets.”

“We’ve dealt with it ever since,” he said, pointing to stock market losses.

“Given the fact that we have changed so quickly and our psychology has changed so quickly, I think we are far from the end of volatility, especially in the fall,” Sosnick said. “The September-October period definitely gets more than its share of market weirdness.”

Stock market bottom?

Bank of America’s equity and quant strategist said in a September 2 BofA Global Research report that S&P 500 valuations remain “high”. In their view, “there is no bottom.”

“Initially, the rally from June lows looked more like a cyclical bull market than a bear market rally,” Crisold said in a note to Ned Davis. “Several wide thrusts and widening new highs suggested much of the downside had gone its way.”

But medium-term and long-term ranges are needed to confirm a bull market, and without that confirmation, “we can’t rule out a retest,” he said.

“The S&P 500 has stalled just below its 200-day moving average, losing about half of its gains from June 16th to August 16th,” wrote Clissold. Also, “The percentage of stocks above the 50-day moving average was just below the 90% threshold.”

US stocks closed Friday with weekly losses along with the S&P 500 SPX.
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Dow Jones Industrial Average DJIA drops 3.3%,
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Technology-focused Nasdaq Composite COMP, down 3%
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It fell 4.2%.

US stock markets resume trading on Tuesday after taking a break on Monday to celebrate Labor Day. Next week’s economic calendar will include data on U.S. services, unemployment claims, consumer credit, and the release of his Fed’s “Beige Book,” a compilation of business anecdotes across the country.

Liz Ann Saunders, chief investment strategist at Charles Schwab & Co., said in a telephone interview that the Fed will continue to raise interest rates aggressively, and corporate earnings and the labor market are expected to remain weak. “This is not a strong backdrop for the stock market,” he said. He also said, “We know that seasonally September tends to be a weak month.”

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