Investors Mull ‘What Next’ as S&P 500 Again Gets Bearish

September 23, 2022

The stock market’s resilience is facing a big test as interest rates hit multiyear highs and stocks plumb recent lows.  

As of this writing, the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ), which track the S&P 500 and the Nasdaq-100, respectively, are both just ticks off their June lows. 

The S&P 500 dropped to 3662.87, below its June closing low of 3,667, before rebounding. The Nasdaq-100 was last trading slightly higher than its 11,128 June low. 

 

 

Markets that have taken punch after punch in recent weeks without much buckling are facing perhaps their biggest test. At its worst point in June, the S&P 500 was down 23.6% from its all-time high set in January. 

That put the index in a bear market, based on the rule of thumb of a 20% decline from recent highs. But the S&P 500’s decline only exceeded the threshold by a few percentage points before rallying more than 17% between June and August. 

That rally was based on sentiment that inflation had peaked and the Fed would stop hiking rates. Those assumptions have been met with resistance, as hotter-than-expected August inflation data has put the Fed on a path of hiking rates likely into 2023. 

Expectations for the terminal rate, or the highest federal funds rate before the central bank stops hiking, recently breached 4.5%—almost a full percentage point higher than where they stood a month ago.  

Those higher rates have investors again coming to grips with the possibility that the U.S. central bank might push the economy into a recession as it battles to bring inflation down from four-decade highs. 

Recession Risks Rise  

In the three months between the S&P 500’s June lows and today, the durability of the U.S. jobs market has given investors hope that the economy would withstand the Fed’s hikes. But many investors and even the Fed itself are skeptical that the jobs market can hold up under the strain of such aggressive rate hikes. 

According to the latest projections from the Fed, unemployment may rise to 4.4% next year, up from 3.5% in July.  

That would likely fit the definition of a recession under the Sahm Rule. Per that indicator, a half point increase in the three-month moving average of the unemployment rate signals the start of a recession.  

Investors will watch closely to see whether the robust jobs market begins to show weakness as the fed funds rate potentially surpasses 4% by the end of the year. They’ll also scrutinize the impact of higher rates on corporate profits, which, while slowing in recent quarters, have continued to grow. 

Investors will also watch to see whether inflation falls in response to rate hikes, or if it stays high and forces the central bank to push them up further. How this plays out will determine whether markets maintain their relative resilience among buffeting forces, or descend into something a bit more frightening. 

 

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2    

Find your next ETF

Reset All