Bear market could last until October, says BofA

  • US stocks have yet to fall further, even after a sharp drop this week, Bank of America said on Friday.
  • The Nasdaq this week fell 5% in one session as investors grapple with tighter monetary policy from the Fed.
  • Based on previous bear markets, the bank sees stocks falling through October 2022.

The S&P 500’s sell-off over the week deepened this year’s correction for the broader index, and it is likely to sink further before bottoming out and recovering, according to Bank of America.

The bank’s chief investment strategist said in a note Friday that investors will spend much of 2022 looking at inflation, rates and


shocks that should result in negative and volatile returns in absolute terms.

“Past performance is not a guide to future performance, but if it were, today’s

bear market

ends Oct. 19, 2022 with S&P 500 at 3,000, Nasdaq at 10,000,” wrote Michael Hartnett, chief investment strategist at Bank of America Global Research, in the weekly “Flow Show.”

The S&P 500 would have to fall about 28% to reach 3,000 and the Nasdaq would have to fall another 18% to reach 10,000, each from Thursday’s close.

Whipsaw’s trading action on Wall Street was not far from investors’ minds as the week ended. Stocks soared on Wednesday after

Federal Reserve

Chairman Jerome Powell said the central bank was not actively considering a big 75 basis point interest rate hike, lifting the S&P 500 by 3% and the Nasdaq Composite by 3.2%. The gains disappeared just a day later, with rising bond yields pressuring stocks, causing the S&P 500 to lose 3.6% and the Nasdaq to drop 5%.

The S&P 500 so far this year is in a correction, down 14% from its all-time high of 4,818.62 points recorded on January 4. The Nasdaq is already in a bear market, suffering a 22% loss.

The “base case remains stock lows, yield highs yet to be reached,” Hartnett wrote.

Bond yields have risen to multi-year highs, and bond prices are sinking as investors brace for the Federal Reserve to continue an aggressive streak of rate hikes to curb inflation. The central bank is seen as lagging in the fight against inflation, which accelerated to 8.5% in March, the fastest rise since December 1981. The April CPI report is due out next week.

The yield on the 10-year Treasury note and the 30-year yield have risen more than 3%, the highest since November and mid-December 2018, respectively, according to TradeWeb, a fixed income trading platform. The information technology sector of the S&P 500 lost about 4% this week, hit hard as higher yields may reduce the value of future earnings. Stocks are likely to come under more pressure as the Fed’s hawkish line could further boost bond yields.

Investors over the past nine months slowly priced in inflation and rate shocks, but priced in “recession shock” too quickly. “[This] is a problem as stronger-than-expected economic data in the first half of 2022 is causing the market to price in a longer/larger rate/inflation shock,” Hartnett said.

While stocks have slumped, “paralysis rather than panic better describes investor positioning” this year, said Hartnett, who said that for every $100 worth of stocks in the past year, only $3 has been redeemed.

He also said that as of January 2021, the average entry point for $1.1 trillion in entries was 4,274 in the S&P 500, leaving investors “underwater, but only a little bit.” The S&P 500 during the session on Friday hovered around 4,126.

bear market bounce

For bear markets, the average price decline is 37.3% and the average duration is 289 days, Bank of America said, noting that there have been nine bear markets in the past 140 years.

With those numbers in mind, it worked as investors could see the end of the major bleeding in US equities.

The “good news is that a lot of stocks are already there,” with 49% of Nasdaq stocks more than 50% below their 52-week highs and 58% of Nasdaq issues down more than 37 ,3 %. He said that 77% of the index is in a bear market, or down more than 20%.

The “good news is that bear markets are faster than bull markets,” BofA said.

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