The S&P 500 and Nasdaq posted their biggest weekly percentage drop last week with the S&P 500 and Nasdaq logging their biggest weekly percentage drops since the onset of the epidemic in March 2020.
The S&P 500 posted its third week of declines, ending 8.3% down from its record high in January. The Nasdaq was down 14.3% from its November peak after falling into correction territory earlier in the week.
U.S. stock futures fell again this morning as geopolitical tensions in Ukraine slammed risk appetite.
Stocks are off to a rough start this year, and outlooks are turning darker due to the rough start to the year, as a result of inflation, Fed policy uncertainty and Omicron.
In the first half, a rate shock in the first half and a recession panic in the second half have led to negative returns for both stocks and credit in the year 2022, according to analysts with Bank of America.
The Bank of America chief investment strategist Michael Hartnett wrote in a recent note that rates up and profits down bad combo for credit and stocks.
Hartnett believes the Fed is hysterically behind the curve and should hike 50 basis points at its meeting this week. Lead indicators for corporate profits, such as the NY Empire Manufacturing Survey, are starting to go south at the same time. The Fed is hiking into overvalued credit and equity markets and Fed tightening always breaks something, he wrote.
He recommends being long on volatility, high quality and defensives on tighter financial conditions.
In a note, Michael Wilson, a long-time skeptic of the bull market, writes that Winter is here for stocks. Wilson said the retreat may have more to go, given tighter monetary policy and decelerating growth.
Oliver Allen, markets economist for Capital Economics, pointed out that this recent setback only reversed a portion of the gains achieved during the Pandemic. The S&P 500 is about 40% more than its current level at the end of 2019 and the Nasdaq is still about 60% higher.
Bear markets usually occur during recessions or worry about an economic slowdown, but Capital believes that the recovery will continue at a healthy pace.
The history supports their view. The stock market has risen at an average annualized rate of 9% during the 12 Fed rate hike cycles since the 1950 s and delivered positive returns in 11, according to Bloomberg reports.
Capital is sticking to its prediction that the S&P 500 will make moderate gains to 4,900 by the end of the year. According to Bloomberg, strategists on average predict the S&P 500 will finish at 4,982, 13% above Friday s close.
With the Fed decision coming Wednesday, and earnings shifting into high gear with Apple, Tesla and Microsoft due to report this week, investors will have plenty to chew on.