The extreme market volatility that has plagued stocks in 2022 and caused the S&P 500 to lose 23% of its value is likely to continue for as long as the Federal Reserve and other central banks tighten monetary policy, The Wall Street Journal reports.
This makes the first half of 2022 the worst start to a year for stock investors since 1932.
Stocks have historically not bottomed out until the Fed does a 180-degree-turn and begins to ease monetary policy, according to WSJ's "The Lords of Money Pose Massive Threats to Markets." Complementing this article is another WSJ piece, "Stocks Historically Don't Bottom Out Until the Fed Eases."
Thus, some Wall Street experts are not advising their clients to "buy the dip," as they have in other market downturns. They also note that even though stock price-to-earnings (P/E) valuations of stocks in the S&P 500 have been trimmed back down to 15.4 times forward earnings — just a hair below their 15-year average of 15.7 — there is a real probability that because of the Fed's monetary actions, they could still fall further.
As for the question of whether or not inflation is easing or still on the rise, Wall Street insiders say that inflation generally peaks at the start of a recession.
"If history is any guide, the selloff might still be in its early stages," WSJ says. "The Fed has only just gotten started. After approving its largest interest-rate increase since 1994 on Wednesday, the central bank signaled that it intends to raise rates several more times this year so it can tamp down inflation."
Inflation in the U.S. is at a 40-year high, which is compelling the Fed to continue to raise interest rates, or the fed funds rate.
Further, retail sales, home construction, investor sentiment, manufacturing and air freight have all been showing signs of contraction in recent weeks.
While corporate earnings for the first quarter were strong, leading giants including Apple, Meta and Alphabet warn of headwinds in the second quarter and into the rest of 2022. An overwhelming majority, 417, of the S&P 500 companies mentioned inflation in their earnings calls for the first quarter, according to FactSet.
Analysts expect second and third quarter earnings will come under additional pressure.
Not (Yet) Bottoming Out
"I don't think the rate of the decline in the market will continue at this pace, but the idea that we're approaching the bottom — that's really hard to come up with," David Donabedian, chief investment officer of CIBC Private Wealth US, tells the Journal.
Charles-Henry Monchau, chief investment officer at Syz Bank, adds: "Our feeling is that if the next inflation figure is very high again, the Fed could [raise rates] even more sharply."
Consensus is building on Wall Street that the U.S. economy may enter a recession later this year or early 2023.
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