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The Calm After the Storm?


18 May 2022

Investors have endured a difficult time in the financial markets lately. Global equities have plunged as market confidence continues to dwindle. It’s no surprise, considering that the U.S. economy is strongly forecasted to enter an economic downturn within the next two years, led by rising interest rates to combat inflation, which is running at more than triple the Fed’s intended target.

The Nasdaq already finds itself in a bear market, down 23% from its November 2021 high. High-growth, yet unprofitable tech stocks, listed on the Nasdaq Composite, have slumped in recent months. That contagion has even affected companies with healthy cash flows in recent weeks.

Falling equity prices have wiped most of its gains realised from their pandemic lows in March 2020. Despite that, the Dow Jones Industrial Average and the S&P 500 have managed to side-step bear market territory of 20%. What investors are asking is this: ‘how far is the market expected to fall?’ More specifically, have the financial markets tanked out already, or are prices set to decline further?

The Worst Could be Over… Almost

The 2022 bear market isn’t over just yet. The Nasdaq’s fall into bearish terrain could still create a domino effect for the benchmark S&P 500, which is currently trailing more than 16% since its peak in January 2022. The markets are still trying to rally. Stocks witnessed an impressive 2.4% gain on Friday, although the late upswing couldn’t recoup losses from earlier in the week. It was the sixth consecutive week in the red for the major indices, a string of losses that last took place in 2011.

The S&P 500, which has been flirting with a bear market for much of 2022 is trailing more than 16% since its January peak. It would be no surprise for the benchmark index to follow Nasdaq above a 20% decline.

Equities enjoyed a two-week rally following the Federal Reserves first rate hike in March 2022. However, this turned out to be short lived, after these gains were quickly erased by a brutal April sell off that continued into May. Some new signals suggest that the market bottom is near, including investor sentiment surveys and increasing stability in the Treasury market last week. However, the market may need to take another sizable step down before any substantial upwards movement takes place.

What’s in Store for the Months Ahead?

Investors should be comfortable with the prospect of markets remaining choppy for the remainder of 2022. Although we’ve most likely entered the final stages of significant decline for equity markets. Stocks are expected to have a hard time rallying in the short-term considering the Fed’s plan to raise rates throughout the summer. With April CPI inflation coming in at a disappointing 0.3% MoM, investors could take this as a warning that the Federal Reserve won’t be taking its foot off the pedal anytime soon.

The best opportunities appear in the stock market when fear is the highest. Even long-term investors can capitalise off short-term opportunities during periods characterised by significant volatility.

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