Investors in the U.S. retail market have been buying this dip ever since the market crashed and stock prices began to fall. For long-term investors in top US stocks, this may be the right approach because buy low, sell high is a strong policy for creating assets in the long run. Currently, markets are slipping and may witness further declines.
Mr. Sarkar, former Wall Street manager and member of the Financial Advisory Council of Finstore, He, who has a vibe in the US stock market, shared his views with FE Online on the current situation. Read his opinion on why the market is falling and when it is likely to rise in the long run.
There have been significant sales in the US stock market this year. This is the worst start of a year in almost a century. As of May 10, the S&P 500 index is down 16% year-over-year, with tech heavy Nasdaq down 25%. Smaller cap growth stocks performed even worse.
But this dramatic decline needs to be kept in the context of the returns earned over the last 5 years or so. Even with this sale, the S&P 500 has returned 82% and the Nasdaq 126% over the last 5 years. By comparison, the Vanguard Europe Index returned 18%, the MSCI Emerging Markets Index returned 8%, while the MSCI India Index returned 40% (all returns in USD).
The main reason for the sell-off is that inflation is currently at a 40-year high and the US Fed is pushing ahead with aggressive fiscal austerity and balance sheet reduction plans. There are fears that the recession is coming, or worse, stagnation, caused by the number of inflationes that refuse to slow down even as the economy slows. The uncertainty of the Ukraine war and the threat of a sharp recession (another major engine of global growth) are fueling investor anger outside China.
So, how long will it take retail investors to recover from the current US collapse?
To answer this question, we must first answer if we are below or near this cell of wave. From a technical point of view it would appear that we need to go further. The S&P 500 index needs to sell 8-10% more before it meets the long-term trend.
A similar conclusion is reached if one looks at other technical parameters such as the percentage of stock trading above their 200-day MA compared to the previous market lows.
In our view, a good answer can be found by looking at the negative factors that have caused these sales to stop and determining whether they are declining. Here are some reasons to be more optimistic:
-Fed dot plot (a summary of future rate growth expectations) indicates that the Fed fund rate will increase to about 2.5% in 2022/2023 through half and quarter point increase. It is considered a neutral rate that is not stimulating or limiting. The Fed will then take a break and look at the state of the economy and inflation to decide what to do next. It is our belief that by the end of 2022 or earlier, inflation will be under control, as supply chain problems become more volatile. The Fed, then, will remain in an extended holding pattern. This will be explained positively by the market.
- Corporate earnings reports, along with recent economic data, point to a low probability that the US economy could soon fall into recession. Moreover, much of the market valuation is already over – the S&P 500 12-month forward PE is already at its lowest level since April 2020.
- Recent Chinese news indicates that the current Kovid wave has been captured
- There are indications that some kind of ceasefire or limited ceasefire may occur in Ukraine in the next few months.
The S&P 500 needs to rise about 20% from here for the current fall. We expect a slow and steady recovery from here and a shortfall of 1.5 to 2 years.