(Bloomberg) — Trillions have been chanted, major indices corrected and a hellish week followed by one frantic Monday and another Tuesday selloff. People trying to believe when the pain might end are worried.
It’s an age-old exercise in quasi-futility, trying to select the bottom in a market that shows itself to be capable of swinging by several percent, several times a day. While no one could have a precise idea of where the destination lay amidst the volatility that yesterday reached its highest in 21 years, thinking about the many forces acting on emotion and how things can turn, Frameworks are emerging for estimating this.
“Investors are starting to appreciate the precarious state of valuations mixed with rapidly rising inflation and the labor market that gives the Fed to dramatically tighten cover,” said Max Gokhman, Alphatrai Chief Investment Officer. “Earnings will be more important, but ultimately we need to look at valuations more before we get down here.”
A simple model is price versus profit. The Nasdaq 100 trades at 25 times forward earnings, down from 30 at the end of 2021. In the last two major selloffs, the price-to-earnings ratio dropped to as low as 18 and as low as 16 before a meaningful rally started. At the current earnings forecast of $569.6 per share, the index would need to fall more than 25% before the P/E reaches 18.
Another framework is history. The market’s potential during the Fed’s withdrawal of stimulus was demonstrated in the fourth quarter of 2018, when the S&P 500 slid within a 20% correction mark. The worst sell-off of the post-crisis era, before the coronavirus panic, was a brutal test of trader fortunes. This saw the S&P 500 vary more than 2% eight times. Based on earnings, the stock was cheap in those days — about 20 times annual earnings when the route began, compared to more than 26 at the end of 2021.
In the latest downswing, US equities have lost more than $5 trillion in value since peaking in November as software and internet stocks with nose-bleeding valuations led rate-fueled carnage. Down 13% in January, the Nasdaq 100 is on course for its worst month since the 2008 global financial crisis.
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The Federal Reserve remains at the center of investor stress lists. Traders are determined to anticipate that central banks will move forward with rising borrowing costs, even as riskier assets fall.
Matt Miskin, co-chief investment strategist at John Hancock Investment Management, said the FOMC meeting this week is a “thorn in the road.” If the central bank accepts weak economic data, geopolitical risks, or that they may take a more lenient route, a market reversal could occur. Should officials not give any indication that economic data has changed, which could pose other risks, “we could see further selling pressure.” In that scenario, it wouldn’t be unthinkable for the stock to drop 20% from recent highs.
“It’s still a ‘assessment re-rating’ story and it’s inspired by the Fed,” he said by phone.
As of Friday, much of the risk was priced in ahead of the Fed meeting that began on Tuesday. According to Stuart Kaiser, head of equity derivatives research at UBS Group AG, the option signaled a move of 2.7% in either direction, compared to the 0.6% average realized going back in 2013. The S&P has risen more than 2.7% on FOMC day only once in the last 75 meetings – which was in March 2020, they wrote in a note.
Art Hogan, chief market strategist at National Securities, said he is looking for a few factors to signal when relief may come. For one, there’s a lot to find a reason for the bounce, based on how quickly the market fell and how much damage has already been done. The average stock in the S&P 500 is down about 30% from its high, “so we’ve had a lot of losses under the hood that we have at index levels,” which could point to the gauge being close to making the bottom. Is. than it has to be at the beginning of something more serious.
Second, major US indices are trading in oversold territory. For example, the Nasdaq Composite’s 14-day relative-strength index (RSI) is below 25. And third, “and what usually gives pressure to sell a crescendo,” is the shift from macro concerns — including the Fed and geopolitical concerns — beginning to be seen on a company-by-company basis, which allows investors to Gives time to re-evaluate shares one by one when higher earnings reports come in.
This week and next, it will report more than 55% of the S&P 500’s market-cap, according to Credit Suisse. Megacaps including Apple Inc., Microsoft Corp. And Tesla Inc. is all set to report earnings in the week.
“Investors take a step back and say, ‘Wait a minute, punishment doesn’t equal a crime,’ and that’s likely to be the case this earnings season,” Hogan said over the phone. “We will reevaluate what we have done for those equities.”
According to Gina Martin Adams at Bloomberg Intelligence, another catalyst to help the market find lows this week — in addition to the potential for stocks to be oversold and bounce around a Fed meeting — is the still high-risk premium stocks command on bonds. . who compared stock earnings to 10-year Treasuries. The latest premium is in the 78th percentile since the early 1960s — and it justifies the rotation of the shares, he wrote in a note.
Meanwhile, Jim Paulsen, chief investment strategist at Leuthold Group, said a bottom may be close as fear among investors has peaked – as indicated by the pace of the decline in prices, a spike in the VIX and a rush back in bonds.
“It’s evidence of the fear that tells me at some point that those who want are out there,” he said. When this happens, “which allows marginal buyers without any sellers to actually move the market up again.”
– With assistance from Elaine Chen and Lu Wang.
