Some would argue that the brief Covid-induced bear market in the spring of 2020 did little to change investor sentiment.
Despite this, the broader market may not yet have reached the proverbial capitulation point, the widespread feeling of surrender among investors that often signals a bottom. After all, the S&P 500 is still trading 20% above pre-pandemic levels.
More selling could be on the cards before the bear market runs its course
So stocks may need to fall a lot more before the market finally bottoms out, especially as the Federal Reserve appears intent on raising interest rates more aggressively to fight inflation, no matter what happens to stocks.
“The current combination of an exceptionally strong labor market and excessively high inflation increases the likelihood that the Fed will stay the course on rate hikes, even if the S&P 500 falls into bear market territory,” said Gavin Stephens, director of Goelzer portfolio management. Investment Management, in an email.
“History shows that the Fed will tolerate large declines in equity prices if conditions warrant. Those conditions exist today, which means we shouldn’t expect the Fed to come to the stock market’s rescue right now,” he added. .
The good news for investors is that stocks are now much cheaper than they were before this year’s market crash. According to FactSet data, the S&P 500 is now trading at about 16.6 times earnings estimates for this year. That’s below the five- and 10-year averages of the index.
But stocks can be “cheap” for good reason. First-quarter profit was up just 9% from a year earlier, the slowest growth rate since the fourth quarter of 2020.
Earnings growth is expected to decline further in the near term. Earnings are expected to rise just 4.4% in the second quarter, according to FactSet. And more Fed rate hikes will weigh on earnings.
“It doesn’t look like it’s time to bottom out yet,” Christopher Smart, chief global strategist and director of the Barings Investment Institute, said in a report. “Until the markets feel comfortable in the way of long-term rates, investors will not be able to agree on a definition of what is cheap.”
That said, trying to time when the market has bottomed (or top) can be foolish. Many experts argue that investors with diversified portfolios will be better off not panicking.
“You could miss out on the best bounces if you stop investing because of a potential recession. You risk the market going higher while you wait on the sidelines,” said Tony Molina, product evangelist at Wealthfront.
“It’s important to remember that volatility is a normal part of investing, and you don’t really lose money unless you sell your investments for less than you paid for them,” he added. “History shows that markets tend to go up over the long term, which means that if you follow a diversified strategy and keep investing, you are likely to come out ahead.”
In other words, the storm clouds may not be ready to part with the stock just yet. But just as rainy days eventually give way to sunshine, patient investors can count on another market bull run once this volatility subsides.