How Low Can It Go: The US Stock Market in Crisis
The question on many investors' minds is not whether the US stock market will continue to fall, but how low it can go. Over the past 120 years, the NYSE has seen 90 out of the original stocks defunct and no longer trading. This historical trend highlights the volatile nature of the market and the challenges ahead.
Current Economic Uncertainty
Looking forward, the situation appears to be deteriorating rapidly. The Federal Reserve's approach is seen as backward-looking, with rent and other costs expected to rise due to their data lag. Furthermore, confidence levels among individual investors are at their lowest in decades, with an AAII sentiment indicator hovering above 60 bearish for two consecutive weeks, signaling a lack of optimism regarding a Fed pivot.
Monetary Policy Impact
The Federal Reserve is raising interest rates at the fastest rate ever recorded. Additionally, they are selling approximately 100 billion dollars' worth of bonds each month. However, this is compounded by the sale of US Treasury bonds by other countries to support their own currencies, leading to a potential credit crunch.
Given the current interest rates and the Fed's aggressive stance, it appears that no bank would be willing to lend money. Smaller businesses, already burdened by high borrowing costs, are particularly vulnerable. The stock market's prospects are further undermined by the possibility of a 3-year period of no economic growth, as predicted by the Fed, coupled with high inflation and unemployment rates forced upward.
Market Performance and Expectations
The Nasdaq has already experienced a significant drop of around 35% year-to-date (YTD). A further drop of 5-10% would be unprecedented without a major calamity. While there are concerns about a dual crisis of high inflation and interest rates, the possibility of another 2-3 years of tax and spend policies further complicates the outlook.
Stock Market Strategy and Outlook
As the Fed continues to raise rates without a clear end in sight, maintaining a cautious approach is wise. Despite the historical norm of buying during market downturns, the current situation is unclear and complex. Traditionally, a 35% market drop signals a strong buying opportunity, but the fear of a long-term downturn overshadows the historical averages.
The foundational belief is that while the short-term outlook remains uncertain, long-term valuations and fundamentals may still provide a strong foundation for recovery. Companies that have recently reported guidance, such as Nike, Micron, and Rite Aid, have issued notably poor outlooks. Additionally, rumors about the iPhone 14's reduced order volumes suggest that major corporations like Apple are under pressure.
While the short-term outlook is bleak, the optimistic view is that the market may find support around the SPX 3500-3600 level. Meanwhile, earnings reports may not be as catastrophic as investors fear. This cautious optimism is tempered by the fact that the Federal Reserve, no longer personally invested in the market, expresses no interest in mitigating a market crash.
Conclusion
In conclusion, the current turmoil in the US stock market poses significant challenges for short- and medium-term investors. However, the historical perspective and ongoing economic data suggest that a combination of cautious investment strategies and a long-term outlook may provide the best path forward. As the situation continues to evolve, monitoring the markets closely and staying informed on changing economic conditions will remain essential.