Is This the Bottom of the Market Drop? Look for Three Rebound Clues.
By Mark A. Vergenes
Stocks dropped again in the past few weeks, continuing a bear market that began in late April. While bad news drove the start of the market drop, successive declines are most likely due to momentum and technicals (which means the selling is causing more selling).
A few solid bounces made these weekly losses less painful, but have we reached the bottom? Financial pros are looking for three clues to determine when the direction of the market will rebound.
Clues for a Rebound: Chinese Lockdowns Ease and Economic Growth Ensues
Chinese information about the scale of the coronavirus disease is generally unreliable, but if cases drop, the market will tell us. If China COVID-19 cases drop, many other things happen as a result. (1) Chinese PMIs rise back above 50, and (2) the Yuan moves back towards (and below) 6.50 to the dollar (currently around 6.75 to the dollar). If these two things happen, it’s a clear signal that the market is confident that the Chinese economy is sustainably recovering, which will reduce the chances of a global recession. Bloomberg has also mentioned that a drop in COVID-19 cases should keep any Chinese shutdown earnings declines to a minimum.
Clues for a Rebound: Inflation Declines and the Fed Eases Off the Hawkish Rhetoric
If the CPI, the Core PCE Price Index, and the price indices in the monthly PMIs start to decline meaningfully, the CPI may get back down near 3%-5% by August. If that happens, the Fed should back off the hawkish rhetoric, which will help the market rebound. However, it’s important to note stopping inflation along will not necessarily trigger a rebound. We have to see inflation metrics decline in earnest to make the Fed less hawkish and drive a market rebound.
Clues for a Rebound. Geopolitical Tensions Decline
The Russia/Ukraine war is a tragedy for humanity. The conflict seems to be devolving into a stalemate that could last for months, even years. From a market standpoint, the resulting spike in commodities is causing headwinds on earnings and increasing the chances of a recession in the EU. If we see oil move back close to pre-war levels below $90/bbl (currently around $114/bbl) and wheat fall back below $9/bushel (currently above $11/bushel), that will be a clear sign that the Russia/Ukraine conflict’s impact on the economy and markets is fading (regardless of the headlines). NOTE: RECENT NEWS SAYS EU may not participate in embargo, which will send oil prices lower.
How Likely is a Rebound?
I expect to see a market bounce (perhaps to 4,200 in the S&P or even higher), but for a true, sustainable rebound to occur, the factors driving the declines must improve.
Finally, there’s nothing concrete to indicate that we’ve reached the bottom of this market slide for those wanting to buy low. But if you’re going to buy low, look for value, minimum volatility, financials, commodities, and tech. Signs point to a consistent headwind on tech for quarters and possibly years ahead.