Bullish or bearish, in stocks lately, the punishment has been the same. Fast and brutal.
Lockdown moves, one day up and the next day down, have swept the market like storms, as worries about inflation alternate with optimism that the economy can handle it.
Tuesday’s swing, in which more than 400 S&P 500 companies moved in the same direction, is a pattern that has repeated itself 79 times in 2022, a pace that, if sustained, would top any year. since at least 1997.
A market too hot to handle makes life impossible for would-be timekeepers, plagued by differing views on how to play the cycle.
Research from Bank of America shows an investor can count on Federal Reserve rate cuts as a sure sign of a market bottom, while another from Ned Davis Research suggests timing your entry based on the first easing is for cupping.
“Macro trends come and go. And I don’t think there are more than a handful of people who can claim to predict that,” said Brad McMillan, chief investment officer at Commonwealth Financial Network.
“I admire the intent behind this, but question the utility.”
Increasingly, the world’s largest stock market is behaving like a giant trade whose direction is unsolvable from day to day.
Tuesday’s losses, the worst in two years, were caused by higher-than-expected inflation. It followed two consecutive sessions where more than 400 S&P 500 stocks rose.
Down 4.8% over five days at 3,873, the S&P 500 lost all of the gains from the previous week. It has now moved in opposite directions by at least 3% for three consecutive weeks, a period of volatility not seen since December 2018.
Whiplash relies on quick stories. The latter pointed to downside risk, particularly after FedEx withdrew its earnings forecast on deteriorating business conditions, a worrying sign for the global economy.
“The conversation immediately went from ‘good earnings despite headwinds’ to ‘future earnings are going to be really tested by higher borrowing costs,'” said Larry Weiss, chief trading officer at shares at Instinet. “We took out 4,100, 4,000 and 3,900 pretty quickly.
All kinds of investors are paying the price. This week’s uproar came after furious coverage from short sellers, who unwound bets the previous week only to find themselves sitting back and watching the market validate the bearish case.
While periods of volatility are supposed to be when active managers shine, the price of getting even a few things wrong in a market as turbulent and correlated as this is costly.
The danger of bad timing can be illustrated by a statistic that highlights the potential penalty an investor faces for refraining from the biggest gains in a day. Without the top five, for example, the S&P 500’s loss for this year jumps from 19% to 30%.
With the Fed’s monetary policy arguably the most important factor in equity investing these days, a big question arises is whether the path of interest rates offers any clues as to the path of this pullback. actions. The answer is unclear.
Bank of America strategists studied seven bear markets and found that the bottom always came after the Fed had started cutting rates – on average 11 months after the first tightening. In other words, investors had better wait for the central bank to become dovish before diving back.
Ed Clissold, strategist at Ned Davis Research, took a similar approach, charting the distance between the start of an easing cycle and the end of a bear market.
Since 1955, when the median bear market ended around the same time the Fed began cutting rates, his analysis has shown that the range has been massive, sometimes years before or after.
“The data argues against using a single rate cut to call for a new bull market,” Clissold wrote in a note.
To complicate matters, the action of the Fed itself is a moving target. After mislabeling inflation as “transient,” the central bank is under increasing pressure to rein in price rises that have mostly turned out to be stronger than expected this year.
With the central bank poised for another big rate hike this week, the fixed income market seems to be changing its mind about when the Fed will reverse course.
A more aggressive Fed fuels bets that a rate cut will come sooner. As a result, short-term Treasury yields jumped more than long-term ones this week, extending yield curve inversions to various tenors.
Updated: September 18, 2022, 5:00 a.m.
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