Stock market declines could continue as the dollar strengthens as Wall Street awaits Fed Chairman Jerome Powell’s speech later this week and as concerns about inflation and a slowing economy rise.
US stocks fell sharply to start the week on August 22 with the S&P 500 down 2.14% and the Nasdaq down 2.55%. Both gold and oil prices also fell. The S&P 500’s drop was the biggest in two months.
The S&P 500 is down again
The market’s four-week winning streak ended last week as investors turned more defensive and braced for weaker economic growth. The stock market could see bigger losses if the S&P fails to break above its 200-day moving average, Scott Minerd, global chief investment officer at Guggenheim, said in a blog post.
Stocks had rallied since the June Fed meeting, and more declines could be in the market as investors grow pessimistic as the chances of a recession increase.
The current rally “failed to break the year-to-date downtrend,” he wrote.
The 200-day moving average is an important indicator to watch because in May 2008 the market bounced back very little from the average.
Stocks then plummeted with the S&P 500 falling another 53% before bottoming out in March 2009, “bringing the steep decline to 57%,” Minerd said.
Failure to break the 200-day moving average was also a critical point during the bear market of 2000–2002.
The two-year period “saw several failed breakout attempts that ultimately resolved into a sharp 49% decline,” he said. “It is also worth noting that the downtrend was not interrupted in any of these episodes.”
Growth stocks are facing tough times
Some sectors, energy and defense stocks, such as consumer staples and utilities, are the only ones to hold gains relative to their respective 200-day moving averages since August 19.
Growth stocks face several headwinds, even as these sectors have led the recovery since June.
Scroll to continue
They remain “below this key technical boundary, indicating more trouble could be in store for growth stocks if the rally does not sustain,” Minerd said.
Waiting for the Fed’s next move
The market is going through a “phase of digestion, fueled by weaker-than-expected economic reports and anxiety ahead of statements and policy cues expected to come from the Jackson Hole Economic Symposium,” said Sam Stovall, chief investment strategist at CFRA Research.
The path of the Fed’s interest rates, part of its strategy to reduce inflation, remains complicated. Sentiment that the Fed will raise interest rates again by 75 basis points in September eased. Investors are on both sides of the fence – bets on a 50-basis-point move are at 49.5% and odds of a 75-basis-point move are pegged at 50.5% ahead of Powell’s speech at the Jackson Hole symposium later this the week.
The market is approaching a crossroads, according to Lowry Research, a CFRA firm.
The range of the market “will likely be the key to the final inflection point in identifying a new sustainable uptrend,” Stovall said.
“New record highs in the Lowry market range indicators, ideally accompanied by an increase in volume, would help confirm a new bull market,” he said. “But a failure at overbought levels, accompanied by signs of oversold, would increase the chances of another decline or test of the June low.”
The coming weeks could shed more light on investors’ strategy for the next two quarters.
“The coming weeks will determine whether investors are advised to continue to gradually embrace the advance, which would then be more likely to last several months, or prepare for the next leg of a longer-term decline,” Stovall said.
If a recession occurs, investors should expect earnings estimates to decline, Minerd said. “Analyst expectations for earnings per share have already fallen slightly since June.
“At a fundamental level, Federal Reserve officials appear determined to reduce inflation by inducing a recession,” he said. “A cyclical decline in price/earnings ratios will likely combine to drive stocks to new lows before this bear market ends.”