In many instances in the past, the stock market didn’t bottom out until the Fed began easing up monetary policies, contends an article in The Wall Street Journal—specifically, 11 out of 17 occasions when the S&P 500 sold off at least 15% since 1950. That means it could still be a long way to bottom for the market, as the Fed is still in tightening mode and has indicated it will likely raise rates several more times before the end of the year in its effort to combat inflation.
It’s that tightening policy that investors worry could send the economy into a downturn, as reports on weakening retail sales, home building and manufacturing, along with negative consumer sentiment, have started to be released. Investors are likely to be sifting through all of that data carefully to try to determine which direction the economy will go in. Some managers are discouraging their clients from buying the dip, such as David Donabedian of CIBC Private Wealth US. He told The Journal that future earnings forecasts looked too optimistic right now to bet on the market turning around any time soon.
With the S&P 500 trading at 15.4 times next year’s expected earnings, many analysts are still predicting that companies will bring in earnings growth in the double-digits in the next 6 months, according to data from FactSet that’s cited in the article. But others are bracing for the possibility that the Fed will have to take even more aggressive action if inflation doesn’t tamp down, and moving away from riskier assets like stocks. And many Wall Street strategists have become more and more pessimistic that the Fed will be able to engineer their “soft landing.” Instead, the central bank’s tightening policy will result in a recession, a scenario in which stocks generally don’t do well; the S&P 500 has plummeted an average of 24% in the recessions going back to 1946.
The light at the end of the tunnel would be when the Fed starts to ease up, which historically has been when the markets rebound swiftly. But when that light will appear—and how much turmoil will happen before it does—is anyone’s guess.