The scene at the New York Stock Exchange on Thursday.
David L. Nemec/NYSE
The stock market has had an ugly start to the year. Whether or not that gets worse, don’t expect it to make any sustained moves—in either direction—right away.
The S&P 500 has entered so-called correction territory several times this month, marking declines of more than 10% from a record high, before regaining ground. Friday morning, it was on the edge of the correction zone, with a loss of almost 9% below the peak it reached on Jan. 3.
The reasons why are well known: Investors expect the Federal Reserve to tighten monetary policy to fight inflation and are concerned that rate increases—four are currently expected this year—will choke off economic growth. Yields on long-dated bonds are rising, making corporate profits that will roll in years from now less valuable in current terms. Investors aren’t willing to pay as much for those profits as they once were, so stock valuations have declined.
While the pain seems to have subsided recently—the S&P 500 is up from its lowest level of the correction—stocks aren’t showing convincing signals of life.
The reality is that the S&P 500 has been bouncing back and forth between two key levels. The index hit as low as 4,222 on Jan. 24, only to undergo a historically fast one-day recovery. Professional traders placed billions of dollars more in buy orders than sell orders as trading drew to a close, after having been doing more selling earlier in the day, according to JPMorgan data.
Within days, the recovery brought the S&P 500 to 4,430, its 200-day moving average, but the index couldn’t surpass that mark. The fact that it hasn’t shows that market participants aren’t confident that the market can maintain its trend higher.
“It’s been …a trading range the first four days this week,” wrote Frank Cappelleri, chief market technician at Instinet, in a Thursday night email.
That trading range, as technicians call it, is likely to remain in place until the market sees new developments. Economists and investors may need to see what kind of economic damage comes from the Fed’s rate increases, but the first move isn’t expected until March. Corporate earnings are largely coming in higher than expected, but it isn’t helping stocks because shares are already expensive, reflecting the profits companies are expected to earn in coming years.
So this leaves the market at a crossroads. Gains seem unlikely, yet the risk of more losses seems limited because the market has already reflected the potential for economic and financial stress ahead.
“I would expect this to be more of a trading range,” said Rhys Williams, chief investment officer at Spouting Rock Asset Management. “Unless there’s some bad news, the market trades around here for a while.”
At some point, stocks will make a move. Investors just need more information first.
Write to Jacob Sonenshine at [email protected]
