Stock prices seem to be bouncing back from their June lows. Will it last?
Inventory got off to a rough start in 2022. S&P 500 ending the first half of the year down 20.6% – worst show in the first half of the year for more than five decades. But while the stock officially entered a bear market in June, they recovered.
The S&P 500 index marked its third straight week of gains last week, and the benchmark is now only down about 14% on the year. Should investors hope for them yet?
“We’re not out of the woods yet, but the market seems to sense that better things await for the economy and stocks,” said John Stoltzfus, investment strategist at Oppenheimer Asset Management. John Stoltzfus, chief investment strategist at Oppenheimer Asset Management said.
Here’s what the experts say on whether this stock market rally will continue.
Investors are getting more and more optimistic
Investors have been extremely pessimistic in recent months. But when investors get that drop in price, there’s room for a rebound, Stoltzfus said.
And we are seeing that pessimism is turning around. American Association of Individual Investors’ most recent sentiment survey showed that investors’ pessimism about the short-term trend of the stock market fell for the fourth consecutive week while the level of optimism was above 30% for the first time in more than two months.
Employment data released by the Labor Department on Friday also provided some relief. The US added 528,000 jobs last month, and the unemployment rate fell to 3.5%.
“It shows that the economy is in recovery and can withstand higher rates,” said Jason Draho, head of Americas asset allocation at UBS Global Wealth Management. This could allow the Federal Reserve to achieve a “soft landing,” he added, referring to a time when the central bank can raise interest rates enough to reduce inflation but avoid a recession.
The companies’ quarterly earnings are also bringing a pleasant surprise to investors. As earnings season kicked in, 74% of companies reported results that exceeded estimates, according to a Stoltzfus research note released Monday.
All eyes will be on the Fed
Inflation has one major impact on the stock market, because investors react to what they think the Fed will do to counter those high prices. When inflation is high, the central bank usually raises short-term interest rates. While the goal is to calm economic activity, higher interest rates also make it more expensive for consumers and businesses to borrow and spend money.
Therefore, investors keep a close eye on the Fed’s decisions about raising interest rates.
Jim Paulsen, investment strategist at The Leuthold Group, told Money by email.
“The case for the Fed to tighten further is rapidly disappearing,” he added.
The low may be behind us
Christopher Harvey, head of equity strategy at Wells Fargo Securities, said his firm does not think we will see a repeat of the stock market lows in the first half of the year.
“We think the floor is now raised,” said Harvey, noting that the Fed said it would tighten monetary first – and it looks like it did – so tightening is likely to slow from this.
Jeff Buchbinder, equity strategist at LPL Financial, said his firm also believes the latest rally has “increased the chances of holding the June low,” according to a commentary by Text is shared with Money.
Buchbinder added: “The extent of the bounce off the June low is approaching the point where a retest becomes unlikely.
While anything is possible, Todd Jones, chief investment officer at asset management firm Gratus Capital, agrees that stock market lows are most likely behind us. However, he recommends that investors should still hold higher cash compared to what they normally have and use Rebalancing process for their portfolio.
Short-term volatility remains a risk
But the big question is what the Fed will do next and the future of the economy. And that’s hard to predict.
“The volatility will continue because there is enough uncertainty to justify that,” Stoltzfus said.
Jones says we could see a significant amount of volatility in the short term, especially since this is a midterm election year and those years tend to be volatile.
“It will likely be strong moves up and down in a fairly well established range,” Jones said. “I call it ‘roughly getting nowhere’, which is really frustrating for a lot of people and especially investors, but it’s really just the price you pay for it. share.”
Draho said UBS has told customers that this is not an environment where you want to do large directional calls. That means you don’t want to over-price and actually reduce your stock allocation because you think there’s more downside, but you also don’t want to load up the stock with the idea that we’re losing money. the start of a new bull market, he added
Long-term investors can be optimistic
According to David Sekera, Director of Morningstar, while volatility will continue to take place as the market continues to face major difficulties such as slowing economic growth, tightening monetary policy, high inflation and With interest rates rising, these headwinds could start to ease in the second half of 2022, according to David Sekera, Morningstar Director of US Market Strategies.
“As these headwinds dissipate, investors will feel more and more comfortable shifting their investment allocation back to the stock market,” Sekera told Money via email.
There are also signs in the economic data that supply chain problems are easing.
“That gives us some confidence that things will get better from an economic perspective,” said Paul Hickey, co-founder of Bespoke Investment Group.
Plus, we’ve recently seen consecutive quarters of negative gross domestic product (GDP) growth. While traditionally it is informal definition of recessionHistorically, markets tend to perform significantly better than average after those periods, Hickey adds. He also noted that typically when investor sentiment is very negative – as previously mentioned, we’ve seen in recent months – long-term returns tend to be better than average.
“From a long-term perspective, you might feel more comfortable with exposure to the stock market,” says Hickey.
In general, there is never a clear signal in the market, Stoltzfus concludes.
“There’s always the potential for volatility, so that’s why it’s important for investors to diversify and find quality investments, while understanding what they own. “.
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