Trying to pick the bottom in stocks every time they fall is proving costlier this year than any time since the 1970s.
Beset with slow and steady declines spread out over days and sometimes weeks, investors are being shaken out of their dip-buying stupor. In 2022, the average drop in the S&P 500 has lasted roughly 2 1/2 days, more than any year since 1974, while its returns following down sessions have been negative 0.2%. That’s also the worst in almost five decades.
In short, the bullish impulse is being wrung out. Investors were pummeled by a confluence of worrying developments Tuesday, among them squishy guidance at industrial bellwether General Electric Co., worsening Covid trends in China, the dollar’s fourth consecutive daily gain and a report showing a weakening in consumer confidence. The Nasdaq 100 Index bore the brunt, falling more than 4% to the lowest in 11 months. The rout continued after hours as disappointing earnings from Alphabet Inc., Microsoft Corp. and Texas Instruments Inc. rattled investors.
“It’s trading like a bear market,” said Brian Donlin, an equity derivatives strategist at Stifel Nicolaus & Co. “Rallies are sold pretty aggressively, and bounces are smaller and smaller.”
Churning losses are a relatively new experience for U.S. investors conditioned by past success hunting bargains. Four months into 2022, the S&P 500 has made 17 separate year-to-date lows -- the most over comparable periods since 1977.
That’s a stark departure from the past decade, when all but one year saw the equity benchmark rising on average after a down day. Many factors may have underpinned the shift, though behind at all is the Federal Reserve.
After coming to the market’s rescue at almost every sign of trouble since the financial crisis, the central bank is showing no such sympathy as it rushes to tamp down inflation. Fed chair Jerome Powell raised interest rates in March, marking the first time since at least 1994 that a hiking cycle started within a month of a major equity selloff.
With the policy of quantitative easing being replaced by the Fed reducing its balance sheet, the central bank has ceded its role as the bull market’s ally and become its largest threat.
As bond yields head higher, one big bull case for equities -- the idea that investors have no choice but to own stocks, sometimes abbreviated TINA for “there is no alternative” -- is in jeopardy.
“At what point do higher fixed income yields create a decent enough alternative?” Tony Pasquariello, a partner at Goldman Sachs Group Inc., wrote in a note Friday. “The QE party has ended, the QT era is very soon to begin, and we’ve clearly transitioned to a regime of much higher volatility.”