It’s a fact of life in struggling markets: someone is always saying things will get worse. According to a number of prominent equity strategists, they’re about to get a lot worse.
After extending its 2022 decline to 13%, the S&P 500 is in danger of an even deeper dive in the months ahead, according to the technical and macro research team at Strategas Research Partners. The group led by Chris Verrone is watching out for a slide toward the 3,500-3,700 area, a range that encompasses the gauge’s 200-week moving average and the midpoint of its entire rally from the 2020 pandemic bottom. A drop to 3,500 would represent a 16% loss from Monday’s close.
Such pessimism is echoed by Morgan Stanley’s Mike Wilson, who says the benchmark is at risk of falling to 3,460 should estimated profit growth start to turn negative amid recession concerns. Investors, clearly spooked, started pulling money out of equity funds in April. While the outflows pale in comparison to what they added over the previous two years, history shows that when selling gets rolling, it’s hard to turn back.
In the previous 10 instances when stocks endured deep losses in the first four months of a year, six saw the market extend its declines through December, and only two saw gains exceeding 10%, Strategas data show.
“2020 is the obvious exception, but down sharply through April has generally meant the rest of the year remains a grind,” Verrone wrote in a note. “Continue to proceed cautiously.”
Heightened volatility has gripped markets since January, when the Federal Reserve made clear its intentions to aggressively fight inflation. The central bank’s first rate hike in three years sent Treasuries into a tailspin and dented the appeal of the stock market’s biggest companies. War in Ukraine, renewed Covid lockdowns in China and other headwinds have upped the risk of a recession, adding to the turbulence.
After spending the first quarter buying the dips, some bulls are giving up after a tumultuous April. In the month through April 27, equity-focused funds saw $30 billion of outflows, data compiled by EPFR Global show.
Yet as bad as last month looked -- the S&P 500’s 9% drop was the index’s worst April performance since 1970 -- the charts show little sign of a bottom to Bloomberg Intelligence’s Gina Martin Adams.
The index’s 14-day relative strength index has yet to touch 30, a threshold signaling stocks have fallen too far, too fast. Meanwhile, the percentage of S&P 500 firms trading above their 50-day moving averages is hovering around 30%, well above levels that signaled the market’s troughs in 2020 and 2018.
“There’s just not a lot of evidence of pure capitulation in the market, which is usually what makes a bottom,” she said on Bloomberg TV. The mega-cap stocks remain a big drag, she added. “It’s just going to be very difficult for the index to gather any momentum.”