(Bloomberg) — It’s been a chaotic, and costly, time for many investors. But 2022 is only half over and the stocks tale will probably have more twists and turns before the year is up.
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Coming off the worst first-half since 1970, US equities now face a triple whammy of sticky inflation, recession risks and the threat to corporate profits from sinking consumer confidence. After just about everyone on Wall Street got their 2022 predictions wrong, investors are now focused on a toxic mix that spells stagflation, as well as more damage to valuations.
“The next 10% will probably be down from here, not up,” said Scott Ladner, chief investment officer at Horizon Investments. “A quick market bottom will need a turn in central bank policy, and we don’t think that’s a possibility in the next few months.”
Indeed, the Federal Reserve is expected to go on hiking rates as it tries to tame inflation, rather than flush the market with cash like it did in 2008 and 2020 — pretty much the rocket fuel for the powerful bull market that’s now come to a halt.
This year is already one of the worst in terms of big daily declines, with the S&P 500 Index falling 2% or more on 14 occasions, putting 2022 in the top 10 list according to data compiled by Bloomberg going back two decades.
Despite that, the CBOE Volatility Index, the so-called fear gauge, is below levels seen in past bear markets, suggesting the market has not yet seen the washout needed to spark a sustainable rally.
Based on the history of past bear markets, the S&P 500 should see some rebound by the end of 2022. In recession years, it’s a different story, with fresh lows to come first.
Michael J. Wilson at Morgan Stanley, one of Wall Street’s most vocal bears, says the S&P 500 needs to drop another 15% to 20% to about 3,000 points for the market to fully reflect the scale of economic contraction. For Peter Garnry, head of equity strategy at Saxo Bank A/S, the bottom is about 35% below January’s record high, implying further declines of about 17%.
“Companies such as Tesla…