The US stock market tumbled on Monday, sparking new speculation about an imminent bear market for the S&P 500. Could an apocalyptic crash occur in the future?
Risk-off sentiment predominated in the US stock market yesterday, as investors, anxious about the Fed interest rate hike, shifted away from equities to USD and Treasury bonds.
The three key US stock indexes dropped sharply yesterday. The Dow Jones Industrial Average fell by 653.67 points or almost 2%, reaching 32,245.7 points. The S&P 500 decreased by 132.1 points or 3.20% to 3,991.24 points. The NASDAQ Composite tumbled by 521.41 or 4.29%, closing at 11 623,25 points.
The S&P 500 has the weakest position out of all three indexes. It has almost touched 4,000 - the lowest level since March 31, 2021.
All sectors on the S&P 500 finished Monday's session in negative territory, except for the consumer staples index (SPLRCS), which edged up by 0.1%.
Tech stocks have suffered the biggest losses, with Microsoft Corp. losing 3.7%, and Tesla Inc. diving by 9.1%.
The S&P 500 Energy Index (SPNY) dropped by 8.3% due to falling oil prices.
Since the beginning of 2022, the S&P 500 lost 16.3%, in the worst four-month start to a year since 1939.
The normalization of Fed monetary policy is putting pressure on equities at the moment.
The last week, the US central bank announced a 50 basis point hike and hinted at 2 more 50 point increases in June and July.
Investors are pricing in a 209 basis points increase this year - the most aggressive tightening path since 1994.
Some analysts compare the current situation with 1981, when the Federal Reserve performed a series of aggressive hikes to bring inflation under control, pushing the economy into recession.
A bigger rate increase by the regulator threatens to cause an economic slowdown. Additional risks, such as the ongoing conflict between Russia and Ukraine, lockdowns in China, and the resulting supply chain disruptions, are aggravating the situation.
In this situation, investors prefer to shift from risky to defensive assets. Risk-off sentiments are likely to intensify even further.
According to the latest poll taken by the American Association of Individual Investors, bearish sentiment in the stock market have approached 53% during the week that ended on May 4, well above the average rating of 30.5%.
The S&P 500 is approaching a bear market, analysts say. A drop by more than 20% would put an end to the pandemic-era rally.
In April, Deutsche Bank forecast a recession accompanied by a 20% S&P 500 drop in 2023. Last week, Bank of America Global Research strategists warned of "rate shock," predicting the current decline in stocks will continue.
In the meantime, Wells Fargo's market strategists stated the S&P 500 has a one in three chance of falling into a bear market if it slipped below a technical support level of 4,100, a level it fell below on Monday.
S&P 500 during recession:
– According to CFRA Research, every recession in the US since 1968 has caused a bear market for equities;– Analysts at The Goldman Sachs have recently put the chances of recession in the next year at 35%;– Overall, the S&P 500 experienced 14 bear markets since 1945, with stocks losing an average of 36% over 289 days.