Market Perspective –
Assessing the risk/reward after the drop & subsequent rebound

Market Perspective

March 18, 2022

What happened

Markets have remained choppy but resilient over recent weeks in the face of uncertainty stemming from the Russia-Ukraine conflict, sharp shifts in the commodity markets, and spiking COVID-19 trends in China. The S&P 500 has popped 6% from its low earlier this week, even as the Federal Reserve (Fed) raised short-term interest rates for the first time in more than three years and Chair Powell took on a decidedly more hawkish tone.

Our take

Markets have rebounded forcefully from an oversold condition and the lower end of our expected near-term trading range of 4100 to 4600 for the S&P 500.

Indeed, buyers stepped in to support the market once again near an 18x forward P/E, which we have highlighted as the first key fundamental support level. Notably, February 24, the day of the Russian invasion, still marks the current low of this recent market correction. With the S&P 500 now trading just above 4400, we still expect the 4600 area, near a 20x forward P/E, to provide stiff near-term resistance.

Part of the market’s resilience can be attributed to depressed investor expectations, which suggests markets are already braced for and discounting some of the known challenges.

Over the past 10 weeks, the percentage of individual investors who consider themselves bullish has averaged just 23.9%, according to a survey from the American Association of Individual Investors (AAII). This is the lowest average level of bullishness since the June 2016 Brexit referendum and one of the least optimistic readings since the survey’s inception in 1987. Historically, this has been followed by consistent and positive returns on a six to 12-month basis for the S&P 500.

Markets have also taken the recent shift in Fed policy in stride given investors were already pricing in an aggressive rate path. Historically, the first rate hike tends to inject volatility, but it does not typically end a bull market.

The S&P 500 has risen at an average annualized rate of 9.4% during the 12 Fed rate hike cycles since the 1950s and showed positive returns in 11 of those instances. The one exception was the 1972-1974 period, which coincided with the 1973-1975 recession. While we expect growth to be slower this year, our baseline view is that U.S. recession risk remains relatively low near term.

 

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