At the same time, second-quarter earnings held up much better than expected, adding credence to the argument that the current selloff might not mean a full retracement of gains, said Victoria Greene, founding partner and chief investment officer at G Squared Private Wealth.
“Fundamentals for companies are actually pretty solid still, and a lot of companies aren’t stretched, and maybe a lot of the supply chain, inflationary, strong dollar might be easing up a little bit,” she said in an interview. “The dollar shot up in Q2 and if it stays a little bit lower or doesn’t continue on its rise, that’s less pressure in the second half than some people were thinking might happen.”
At the start of July, severe damage to stocks had pushed a Bloomberg financial conditions measure to the tightest since 2020. Falling stocks were a key contributor to the tightening, arguably leading Federal Reserve officials to leaven the harsh tone of their inflation-fighting talk over the summer. Could the same thing happen again if selling picks up in the S&P 500? Yes, but at a potentially high cost, says Greene.
“If things get bad enough as the Fed slows down, that’s not good for earnings,” she said. “You’ve got to find that balance of we need the world to get bad enough that the Fed slow down, but we need the world to stay good enough that everybody still is profitable. And that’s the whole threading of the needle and avoiding the hard landing.”
A few analysts have argued that the huge sums parked in buy-and-hold investment products are cushioning equities from a bigger rout. Such accounts total $6.7 trillion, more than one-sixth of the US market, with their share among all domestic-focused equity funds rising 4 percentage points since the end of 2020, data from Bloomberg Intelligence show.
But there are just as many arguments saying index money increases volatility by letting people sell large swaths of equities with a single click.
“With the rise of passive investing, I think it allows investors to sell their portfolios quicker in relation to new data,” Jeff Schulze, investment strategist at ClearBridge Investments, said in an interview at Bloomberg’s New York office. “It creates an environment where selloffs have been much quicker and the rebound has been much faster than what we’ve seen in previous economic expansions.”
-With assistance from Isabelle Lee, Peyton Forte and Lu Wang.
This article was provided by Bloomberg News.