Stocks have almost entered a bear market. What the story says comes next.

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Everything about the markets seemed on the verge of crashing this week.

NYSE

This is the moment of truth for equities and investors may not like what’s to come.

For a while last week, the stock market felt like it was already there. Thursday morning, the


S&P500

The index, down 19.6% from its closing high, was inches away from entering a bear market. the


Nasdaq Compound,

which housed the tech stocks that had fueled the bull market, was plunging. Same


Bitcoin

joined the pity party by breaking $29,000 and falling to nearly $25,000. Everything seemed on the verge of collapse.

But the market did not collapse. Instead, Federal Reserve Chairman Jerome Powell appeared to acknowledge that the Fed might not be able to stage a soft or soft landing, as he had so confidently asserted. after the May 4 political meeting. Instead, he said a recession was possible and largely beyond the Fed’s control. For a Fed that was supposed to be singularly focused on inflation—economic growth be damned—this was a small, if nuanced shift that traders seized on. From Thursday’s low to Friday’s close, the S&P 500 gained 4.3%, and even the


ARK Innovation

the exchange-traded fund (ticker: ARKK), home to so many battered tech stocks, rebounded 24%.

Still, it was a terrible week for the market. the


Dow Jones Industrial Average

fell 2.1%, while the S&P 500 fell 2.4% and the Nasdaq lost 2.8%; but the week ended with enough optimism to ask: is this the bottom line?

History offers little help. If a decline of more than 19% but not quite 20% sounds familiar, it should be. It was a level reached by the S&P 500 in 2018, before the Fed capitulated on monetary policy tightening, and in 2011, when the United States seemed willing to default on its debt and Europe threatened to collapse.

These are big declines, says Doug Ramsey, chief investment officer at Leuthold Group, if not bear markets. Since 1957, the S&P 500 has fallen 19% 15 times. Five of those periods were lows, with stocks immediately bouncing back for a 23% average 12-month gain. Five were followed by further double-digit declines, with an average decline of 32%. Eight were associated with recessions.

However, many of the dips were associated with Fed pivots, Ramsey says. In 2020 the Fed stepped in to support markets when Covid shut down the economy, while in 1998 the collapse of long-term capital management forced the Fed to cut rates and fueled a massive bubble. . But Ramsey thinks the central bank is unlikely to reverse course soon. “We already had a mind-blowing bubble, and the Fed is far from a pivot,” he says, although he acknowledges that it could change its mind quickly.

Still, it’s hard to see things getting any worse, at least in the short term, says Frank Cappelleri, chief market technician at Instinet. On Thursday, the number of S&P 500 stocks trading at 52-week lows hit their 2022 high and are unlikely to rise much further, while the CNN Money Fear & Greed Index traded as low as two before closing at six, levels that can’t get much lower. Even the TICK index, a measure of the number of winning versus losing stocks on the New York Stock Exchange, traded below -1500 for a sixth straight day, a sign of extreme selling.

Such washouts can lead to quick moves up – the S&P 500 rebounded 10% from its March 8 low to its March 30 high – but Cappelleri notes that large daily moves down and up, like the shares recorded on Friday, must stop if the market is going to make a lasting bottom. “They show panic on both sides,” he says. “Neither is a healthy environment.

Trade it at your own risk.

Write to Ben Levisohn at Ben.L[email protected]

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