History says the US stock market should fall further
Investors are wondering how far US stocks will fall this year, after a prolonged sell-off caused Wall Street’s S&P 500 index to drop by more than a fifth to its January peak.
Fears have intensified that the US central bank will push the world’s largest economy into recession, in an attempt to tackle spiraling inflation as interest rates rise. In contrast, the S&P has fallen into bear market territory in recent weeks, which is generally defined as a correction of 20 percent or more from its recent high.
Asked if a bottom is now on the horizon, Société Générale examined 56 “crisis” periods of US stock market corrections over the past 150 years — related to the selling that fueled pullbacks greater than 10 percent for the S&P 500.
In identifying 30 bear markets since 1870, the French bank said history indicates that the S&P index should fall over the next six months at about 34 per cent to 40 per cent below its peak at the start of 2022.
Further declines in US stocks are likely to lead to stagflation – a combination of persistent inflation and little or negative economic growth, said Solomon Tadesse, head of quantitative equity research at Societe Generale for North America.
Tadesse noted that the current correction of the US stock market is not abnormal compared to history. By contrast, the speed and scale of Wall Street’s recovery from the low caused by the coronavirus in March 2020 was extraordinary.
The S&P 500 is up 113 percent after bottoming out on March 23, 2020, buoyed by a massive injection of liquidity provided by the Federal Reserve and generous emergency public spending measures to counter the pandemic. “The post-Covid market impulse now seems very excessive,” Tadesse says. This has led to an unsustainable bubble that is now dwindling, he added.
Investors may prepare for more volatility in the stock market until they are convinced that the Federal Reserve has regained control of inflation – which is currently at a 40-year high of 8.6 per cent.