On Monday, the Bank of America revealed that investors must be prepared as the S&P 500 officially entered bear market territory, indicating that investors will be miserable for some time.
The bank noted that the increasing inflation and inevitable interest rate hikes from the Federal Reserve would play a prominent role in the volatility of stock prices. The Fed is projected to raise the interest rates by 75 points on Wednesday, a significant bump to the expected 50 basis points hike.
The shift follows Friday’s hot CPI inflation report, which exceeded economist estimates and indicated no signs of slowing down.
However, the Bank of America isn’t alone as others shared sentiments of stocks hitting bottom until a peak in inflation is printed.
“Wall Street sentiment is dire but no big low in stocks before big high in yields and inflation,” said the Bank of America. “The latter requires uber-hawkish Fed hikes in June and July.”
The ominous sentiment on Wall Street can be attributed to the decline of global growth optimism, fears of inflation reaching the highest in 14 years, and corporate profit outlooks deteriorating to their worst since 2008, as reported by the Bank of America’s fund manager survey.
Bear Markets’ history shows a V-shaped recovery, not unlike the one in March 2020, which indicates that the bank’s call for misery may be correct.
Chris Murphy of Susquehanna International Group analyzed all 12 bear market sell-offs that occurred through the decades.
“Looking at the other 12 bear markets, we see that on average, after the SPX enter bear market territory, it continues to fall another 14%, taking 103 trading days before reaching a bottom,” said Murphy.
Should a similar decline occur, the S&P 500 would fall even further to 3,250.
The stock market bottom in November makes more sense now as markets rarely hit bottom in the summer months. Additionally, investors will be able to breathe after the midterm elections in early November.
If Republicans win control of the House or Senate, investors will have more reason to be optimistic as the stock market performs best when power is split between Republicans and Democrats in Washington, D.C., according to LPL.
Opinions expressed by NY Weekly contributors are their own.