Investors seemingly can’t stop trying to pick a stock market bottom, no matter how bad the news—and it continues to backfire. The day for a real bounce, however, may be coming soon.
Consider: This past Thursday, September’s consumer inflation report came in much hotter than expected, with the core CPI hitting a 40-year high. The initial response was exactly what you’d expect—the S&P 500 traded down as much as 2.4%—but then it started rallying…and rallying. The index finally finished the day up 2.6%, the first time that’s happened since 2008.
The rally had people talking about capitulation and bear-market bottoms, but alas, it was not to be. A rise in inflation expectations that showed up in the University of Michigan’s consumer sentiment survey on Friday pushed Treasury yields to their highest levels since 2008.
As a result, the S&P 500 fell 1.6% this past week, while the Nasdaq Composite dropped 3.1% to close at its lowest level since July 2020. The Dow Jones Industrial Average,thanks to some solid earnings from Walgreens Boots Alliance (ticker: WBA), UnitedHealth Group (UNH), and JPMorgan Chase(JPM), finished the week up 1.2%.
Still, for the first time in a while, it feels like there’s hope. Part of that is simply the market starting to acknowledge the fact that the Federal Reserve will do what it said it would do—crank rates up as high as they need to go to tame inflation. There’s now more than a 70% chance the Fed raises rates over 4.5% by December, which would have been unthinkable just a few months ago.
But the market is starting to act the way it does at lows. Take Thursday’s massive turnaround. The S&P 500 fell 2.4% before finishing up 2.6%, a five-point swing. That’s happened just nine other times since 1983, according to Bespoke Investment Group data. The wild swings often continued—the S&P 500 was down 3.5% on average over the following three months, but up an average of 14.6% over the next 12 months. “We’re not sure when or where the ultimate bottom in stocks will end up, but violent moves like yesterday tend to occur closer to lows than highs,” the folks at Bespoke explain.
Other measures are starting to send similar messages. On Friday, noted Doug Ramsey, chief investment officer at the Leuthold Group, the firm’s Very Long Term Momentum indicator, or VLT, reached an oversold level for the first time since 2016. It’s not a buy signal yet—that happens when the indicator turns up—but it does mean one “is now mathematically possible,” Ramsey writes. “Patience is advised. But this long-term oversold condition should help investors pull the trigger when the time comes.”
It’s also easy to forget that the S&P 500 has already dropped 25% this year, a level that’s approaching the losses in an average recession, in which the market drops 30% to 40%, observes Rick Bookstaber, head of risk at Fabric. That means investors could rightly expect more losses, but a good portion of the index’s losses are likely behind it. “If you look at historical cases of bad market events and recessions, we’re more than halfway there in terms of the pain that the market has had,” he says.
Indeed, it might even be time to start nibbling on individual stocks. Morgan Stanley portfolio manager Andrew Slimmon notes that while the market has dropped 25%, the average stock has fallen far more. He’s actively looking to add companies. “The only stocks we’re adding to or buying new are those that reflect a recession because they are down 40% to 60% already,” he says.
It’s a good place to start.
