"US Stock Market Faces Difficulty Rebounding Before Fed's Monetary Policy Shift"…Caution Against Early Bottom Theory

"Since 1950, Fed direction shifts or rebounds"
"S&P 500 must drop to 3000 level... Risk of buying the dip"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Amid early "bottoming" theories suggesting a rebound will soon begin following the sharp decline in the U.S. New York stock market, the Wall Street Journal (WSJ) reported that comparing past U.S. stock market situations indicates that the market is still in the early stages of a downturn, and that early bottoming theories are premature. The WSJ warned that the market bottom will not come until the U.S. Federal Reserve (Fed) signals a policy change, and that some investors expecting a rebound and buying at the lows could suffer significant losses.

According to the WSJ on the 20th (local time), Vicki Chang, Global Market Strategist at Goldman Sachs, stated in recent research, "Since 1950, there have been 17 instances where the S&P 500 index dropped at least 15% from its peak to its trough, and in 11 of those cases, the market rebounded when the Fed shifted its monetary policy from tightening to easing." She advised against hastily buying at the lows since the market bottom cannot be identified until the Fed signals a policy change.

David Donabedian, Chief Investment Officer (CIO) at CIBC Private Wealth, also told the WSJ, "I do not think the speed of the stock price decline will continue at the current level," but added, "However, it is very difficult to say that we are close to the bottom." He emphasized, "We are advising clients who expect the market to rebound soon against buying at low prices," and stressed, "Stocks still do not appear cheap."

U.S. stock market experts generally agree that, based on the flow of the U.S. stock market so far, the downturn has only just begun and the bottom is not yet visible. Michael Hartnett, Chief Investment Strategist at Bank of America (BOA), told Bloomberg News, "This is the 20th recession in the 140-year history of the U.S. stock market. Past recessions lasted an average of 289 days and saw an average decline of 37.3% from peak to trough." He argued, "Applying this movement to the current situation means that the S&P 500 index, currently hovering in the 3600s, is not at the bottom until it falls to the 3000s."

The focus is on how long the Fed's ultra-hawkish tightening policy will continue. Some analysts suggest that if rapid interest rate hikes continue to curb the current surge in inflation, the tightening period itself could be shorter.

David Kelly, Chief Global Strategist at JP Morgan, said at a press conference, "The Fed knows that if it raises rates at the current pace through this year or early next year, the risk of a recession becomes very high, so it will not continue raising rates indefinitely." He added, "No one would be surprised if the Fed reverses course and cuts rates within a year."

This content was produced with the assistance of AI translation services.