• February 1, 2023

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Topline

Several Wall Street experts are warning that despite moving higher in recent weeks, the stock market still has further to fall—with recent gains likely to be nothing more than a “bear market rally,” as investor concerns about Fed rate hikes and slowing economic growth continue to weigh on markets.

Key Facts

Despite an earnings season marked by profit warnings from major companies, the stock market has risen significantly from its low point on June 16, with the S&P 500 gaining roughly 12% and rallying for the last three weeks in a row.

With stocks starting to recover from a brutal selloff in the first half of the year, investors are now debating whether recent gains are merely a bear market rally—with stocks set to hit new lows—or the start of a new bull market.

Analysts at Bank of America argue that it’s “premature to declare a ‘big low’ in the market,” predicting more downside ahead and advising investors to remain “tactically cautious,” especially as the Federal Reserve continues to hike interest rates for the foreseeable future.

The firm describes that many traditional indicators of a market bottom are yet to be triggered—such as rising unemployment, the Federal Reserve starting to lower interest rates, a slowdown in profit estimates and a decline in the 2-year Treasury yield.

What’s more, the last three market lows occurred after investors began to sell stocks, which hasn’t happened just yet: Since the end of June, clients have been net buyers of equities rather than sellers, according to Bank of America.

The unexpectedly strong jobs report last Friday, which investors worry will embolden the Fed to continue aggressively raising rates, also signals that the “recent bear market rally” will soon come to an end, according to LPL chief global strategist Quincy Krosby.

What To Watch For:

The optimism about inflation peaking and a looming “Fed pivot”—where the central bank pulls back from its aggressive tightening of monetary policy—is certainly “overdone,” while “nonsensical behaviors” are also returning to the market, according to Vital Knowledge founder Adam Crisafulli. Both factors should “temper” investors’ near-term enthusiasm as they suggest further downside risks, though on the bright side, the U.S. economy is proving “more resilient than it’s being given credit for.”

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Crucial Quote:

“Investors are increasingly in a game of tug-of-war over bullish and bearish talking points,” says Nationwide chief of investment research Mark Hackett. “Confusion is driving investor decisions,” which generally leads to “directionless volatility,” he warns.

Tangent:

What can investors do if the market does hit new lows? “Use bear market rallies to raise cash and rotate into higher quality assets,” according to analysts at Bank of America. “Keep dividend and bond coupon reinvestments paused and use tax-loss harvesting techniques ahead of better buying opportunities this year.”

Further Reading:

Stocks Under Pressure Despite Strong Jobs Report As Investors Fear Bigger Fed Rate Hikes (Forbes)

Here’s Why More Fed Officials Are Warning That The Market Is Getting Ahead Of Itself (Forbes)

Bed Bath & Beyond Surges Nearly 40% As Retail Traders Pile Back Into Meme Stocks (Forbes)

Dow Jumps 400 Points As Stocks Rebound Thanks To Solid Earnings, Upbeat Economic Data (Forbes)

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