By Joseph Adinolfi
Wednesday will mark the 100th trading day of 2022, a year that will likely be remembered for its historic market turbulence as the megacap tech stocks that had dominated the market for so long collapsed in what has been the most punishing retrenchment since the dot-com bust.
And with stocks mired deep in the red once again following a painfully short-lived bounce, the main U.S. benchmarks on Wednesday were set to finalize what has been among the worst starts to a year in market history.
According to Dow Jones Market Data, the S&P 500 /zigman2/quotes/210599714/realtime SPX +3.06% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.68% are on track for the worst first 100 trading days since 1970. And for the Nasdaq-100 /zigman2/quotes/210598364/realtime NDX +3.49% , it’s the worst ever.
After years of outperformance, the Nasdaq /zigman2/quotes/210598365/realtime COMP +3.34% has traded essentially straight lower for the last two months, losing nearly a quarter of its value with only a handful of brief but powerful rallies breaking up the relentless selling. Since March, the index has seen five countertrend rallies of 4% or more, according to Matt Weller, a market technician who studies near-term technical trends.
Analysts have blamed all the usual suspects: the inescapable burden of inflation, which taxes a company’s future earnings, cheapening their value in the present. The hawkish Federal Reserve, which has been content to stand back and refrain from intervening to try to slow or reverse the bloodletting. And of course the war in Ukraine, which has contributed to higher food and energy prices, and shutdowns in China, which has wreaked more havoc on fragile global supply chains.
For investors who are considering whether to reach out and try to snatch a falling knife, there’s plenty of context that could help to put the 2022 selloff in perspective.
For example, Ryan Detrick of LPL Financial recently pointed out that historically, midterm election years are tough for markets. U.S. stocks have lost more than 17% on average peak-to-trough. On average, the market bottoms during these years occur later in the year.
Shifting to discuss some historical points of interest for the S&P 500, the supremely popular U.S. equity benchmark, it’s worth noting that the index has been down for seven consecutive weeks this year, a streak seen just three other times in history: during 2001, 1980 and 1970.
In terms of volatility, the market has also been extremely interesting this year: the S&P 500 has posted intraday swings of 2% or more on almost 40% of the days so far in 2022.
The pace of the selloff, and the impression that the U.S. economy will slide into a recession some time next year have inspired a gloomy outlook on markets. Few, if any, market bulls have come forward to call a bottom. And there’s plenty of data to warrant caution.
Before the market’s most recent attempt at a post-correction rebound faded on Tuesday, a team of analysts at Jefferies produced a note to clients analyzing forward returns for the S&P 500 a year after periods of historical losses to test the conventional wisdom that selloffs like these often reward courageous dip buyers.
In the note, the analysts examined periods where the S&P 500 had dropped 10%, 15%, 20% and 25% from its previous high. Using market data dating back to the 1950s, the analysts found that, historically speaking, U.S. stocks typically don’t recoup their losses within a year, unless the indexes clear the 25% selloff mark.
Perhaps this is one reason why professional money managers remain so cautious. Bank of America’s most recent Global Fund Managers survey showed that over the past month fund managers have increased their cash position by 5%, reaching the highest level in 20 years in May. Recent surveys have also confirmed the gloomy atmosphere by showing that a gauge of financial market risk is at its highest level since Merril Lynch started the survey, with fund managers expecting slowing economic growth and rising rates to continue to weigh on stocks.
That’s not to say there aren’t some bulls left. A team of JP Morgan analysts recently told clients that up to $250 billion of “rebalancing” flows away from bonds and into equities could trigger another brief rebound in stocks before the end of the second quarter.