In Prevalence of Selling, This Is a Market Rout Without Equal
(Bloomberg) — You can look but you won’t find a stretch of futility as pervasive as the one that is landing on Wall Street.
Even in the long and storied history of market meltdowns, the breadth of losses is without equal, based on data that goes back to the Great Depression. In five of the seven sessions through Thursday, at least nine in 10 S&P 500 stocks dropped, a record run of widespread losses, according to Sundial Capital Research.
A similar if slightly less harrowing picture prevailed across asset classes. From Treasuries to corporate bonds and commodities, everything was down for a second straight week, a stretch of sweeping declines that hasn’t happened since the 2013 taper tantrum.
If your view is that bear markets end in bangs rather than whimpers, the last week or so provides evidence that something approaching capitulation is occurring. History, however, shows it doesn’t always work like that. As often as not, first bursts of catharsis give way to extended seasons of inertia in which enthusiasm isn’t so much trampled as drained.
“There’s been really no place to hide and it’s a jarring environment for people who simply aren’t used to it. And most of us aren’t,” said Michael Vogelzang, chief investment officer at CAPTRUST. “This is a valuation markdown and every financial asset and eventually real assets will begin to soften up because interest rates are the price of money.”
Such is the reality faced by investors who are grappling with the most aggressive tightening of monetary policy by the world’s central banks since the 1980s. With hopes for peak inflation dashed following a hotter-than-expected reading in US consumer prices, trepidation over an economic recession is building.
Hedge funds and quant traders have been falling over themselves to exit stocks. Down in 10 of the past 11 weeks, the S&P 500 plunged into a bear market for the second time since the 2020 pandemic outbreak. The index lost 5.8% for its worst week since March 2020.
In the benchmark this month, only 11 stocks are up, none more than 5%, while 38 are down by percentages that round to 20% or more. The median performer, Boston Scientific, has fallen 12% since the start of June. In the Nasdaq 100, the biggest drop belongs to Docusign at 28%, followed by Micron Technology at 25%, then Applied Materials at 23% and Marvell Technology at 22%.
The specter of a recession has prompted investors to start to dump everything, even assets seen benefiting from inflation like commodities. In those declines — congregating suddenly in the few stocks that were up this year — were signs that selling has become something other than voluntary, perhaps liquidations forced by margin calls.
Take Monday, when the S&P 500 tumbled almost 4%, and energy shares ranked at the biggest loser despite a rise in oil prices.
“You’re getting selling really across sector, across company size, across geography. This is a global repricing of equities based on central banks,” said Tom Hainlin, national investment strategist at US Bank Wealth Management. “We’ll start to hear from companies shortly thereafter. The question will be, is this just a repricing based on the Fed, or are you now having to incorporate lower-than-expected earnings growth?”
That’s a question of increasingly extreme urgency. Even with everything that is going wrong, from the Fed to inflation to war and disease, there remains a vocal minority of analysts who believe the selloff is way overblown.
The view isn’t baseless. For all the upheaval, the economic markers that are arguably most relevant for stocks — earnings and earnings forecasts — have barely budged, and while consumer sentiment has frayed, consumer spending remains solid.
“We’re going to avoid recession. This is more like a mid-cycle hiccup that we have a lot in the second year of a bull,” said Jim Paulsen, chief investment strategist at Leuthold Group. “If I’m looking at the next year, I think you’d be happy if you had stayed in here or bought right now.”
But Wall Street has shown a pretty spotty record in predicting downturns. For instance, at the start of 2008, the eve of the global financial crisis, analysts at the time predicted a 15% gain in S&P 500 profits. They ended up falling 72%.
As tempting as it is to call a bottom, history suggests bear markets usually take time to find a floor, especially when they are accompanied by a recession. What seemed like a cathartic selloff in June 2008 — a loss almost identical to April’s of this year — was followed close behind by three months that were appreciably worse and two more of almost equal size.
The same was true during the bursting of the internet bubble. After posting two straight quarters of giant losses in early 2001, the S&P 500 dropped more than 10% in three of the following six periods.
Examples of much speedier resolutions of course exist, including to the last bear run, in 2020, which turned out to be the fastest ever at just one month. That happened because of unprecedented monetary and fiscal stimulus, something that’s now out of question with the Fed laser-focused on fighting inflation.
For bulls looking for signs that stocks have fallen too far, too fast and are poised for a rebound, there is evidence to support the view. During the five sessions through Thursday, fewer than 1.6% of stocks in the S&P 500 held above their 10-day moving averages, a reading of extremely low breadth that’s been matched only twice before in recent decades, Sundial data shows.
While charts like this can be viewed as flashing an imminent inflection point for the market, such signals appear to have lost their merit this year, according to Jason Goepfert, chief research officer at Sundial.
“One-sided behavior like this has a strong history of being contrarian, but that was also the case in May, and here we are at lower lows,” he wrote in a note. “Everything is horrible, and there is no sustained interest among buyers.”
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