History says the US stock market fell again

Investors are wondering how much further U.S. stocks will fall this year, after a prolonged sell-off that sent Wall Street’s S&P 500 falling more than a fifth below its January peak.

Fears have intensified that the US central bank could tip the world’s largest economy into recession, in a bid to fight soaring inflation with higher interest rates. In turn, the S&P has fallen into bearish territory in recent weeks, generally defined as a correction of 20% or more from a recent high.

Wondering if the bottom is now in sight, Societe Generale looked at 56 “crisis” periods for US stock market corrections over the past 150 years – relating to selloffs that have fueled double-digit declines for the S&P 500.

Identifying 30 bear markets since 1870, the French bank said history suggests the S&P is likely to bottom over the next six months at around 34% to 40% below its peak reached in early 2022.

Solomon Tadesse, SocGen’s head of quantitative equity research for North America, said further declines for US stocks were likely as tighter monetary policy could lead to stagflation – a combination of persistent inflation. and weak or negative economic growth.

Tadesse pointed out that the current US stock market correction is not atypical of history. In contrast, the speed and magnitude of Wall Street’s rebound from the coronavirus-induced low in March 2020 has been extraordinary.

The S&P 500 jumped 113% after hitting a low on March 23, 2020, boosted by huge injections of cash provided by the Fed and generous emergency government spending measures to counter the pandemic. “The post-Covid market surge now appears very excessive,” says Tadesse. This led to an unsustainable bubble that is now deflating, he added.

Investors can prepare for more volatility in the stock market until they are confident that the Fed has regained control of inflation, which is currently at a 40-year high of 8.6%.

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