• June 3, 2023

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The S&P 500 narrowly missed closing out last week in bear market territory—that would be 20% down from market peak, a high point attained after New Year’s. The tech-heavy Nasdaq Composite is already in that cursed status. So when will this torment end?

A lot of the current market malaise centers on the current high inflation (just over 8% yearly) and the Federal Reserve’s willingness, however belated, to curb the surging prices. Higher rates aren’t equities’ friend, especially tech shares.

But even though Fed Chair Jerome Powell has tried to reassure investors that the central bank won’t go nuts with its tightening regime (he ruled out a three-quarter percentage point hike), the fact is that we are in for a steady sequence of increases in coming Fed meetings.

Despite Powell’s talk of moderation, Wall Street knows that higher rates are a blunt instrument that may well curb inflation, yet often cause peripheral damage, like to stocks, not to mention the economy.

The market turning point is called capitulation. That’s when investors (retail ones, for the most part) give up and get out of the market. There are signs that this is happening. Equities in retail mutual funds for stocks had $17 billion in domestic and foreign stock outflows in the most recent week, a huge jump from previous weeks, per the Investment Company Institute.


To Bank of America, this could well mark the beginning of the end for the market drawdown we’ve been suffering. “The definition of true capitulation is investors selling what they love,” then bailing out of the market, writes Michael Hartnett, BofA’s chief strategist, in a report. The bank sees the S&P 500 ending the year at 3,600, although it thinks the low could be 3,000; as of Friday, the S&P was at 3,901.

If the nadir is nigh, then the old adage that it’s always darkest right before the dawn could apply here. Lots of economic data support the negative take on the state of things: existing home sales are falling, a dip in the purchasing manager’s index, an unaccustomed rise in unemployment claims, and a drop in the Conference Board’s Index of Leading Indicators. Target, which had been doing very well, now reports that its margins are getting squeezed.

Even encouraging developments are getting a big raspberry from the market. An impressive 77% of the S&P 500 companies reporting first quarter earnings (only a few stragglers are left to report) have results that beat analysts’ estimates, according to FactSet research. The beats average 4.7% over the consensus.

No matter. Companies with positive surprises have gotten hit with an average price slide of 0.5% two days before the earnings release through two days afterward.

Trouble is, Nostradamus doesn’t work on Wall Street. Enough upcoming trouble may be brewing to postpone the ultimate market bottom, and capitulation. The Ukraine war, the virus that won’t go away and inflation that may be more stubborn than the Fed thinks—all could do mischief with our hopes and expectations.

What we do know is that, at some point, this nightmare will be over.


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