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It’s been a rough start to 2022…
With the S&P 500 in an official correction last week – down as much as 15% from its highs. Meanwhile, the NASDAQ briefly entered a bear market – dropping 20%.
U.S. stocks had already been under pressure due to high inflation and the likelihood for rising interest rates.
Then Vladimir Putin decided to invade the Ukraine. And the equities dropped even further.
During Thursday’s trading – stocks staged a remarkable recovery. The S&P and Nasdaq reversed a 2% drop and ended the day higher. Meanwhile, Friday’s trading action saw solid gains as well.
So, what’s next for stocks?
Go here for my #1 trade of 2022 – it’s NOT the FAANG stocks.
Thursday’s intraday low may mark the bottom for the market.
Here’s why…
First, the stock market sold off on rumors of an upcoming invasion of Ukraine. Yet stocks rose once the event actually happened. It’s a classic “sell the rumor, buy the news” situation.
History tells us that last week may mark a bottom for stocks. Consider the market performance during five previous conflicts – the Vietnam War, Gulf War, Afghanistan War, Iraq War and Crimea. In every situation – the stock market bottomed right before the invasion.
It’s now clear that the U.S. and other countries aren’t going to be drawn into another military conflict. The U.S. and Europe appear to be on the same page in terms of putting economic sanctions on Russia.
President Biden’s speech on Thursday also instilled confidence in the markets. It’s worth noting that the markets abruptly reversed course immediately after his press conference.
The markets have effectively priced in a worst-case scenario. Russia has invaded the Ukraine. It’ll either occupy the country or install its own pro-Putin government. Or perhaps both.
The conflict with Russia does pose challenges to global markets for oil, natural gas and wheat. However, the U.S. in particularly isn’t very dependent on Russia. Any restrictions on trade will likely have a greater impact on Europe – which is a large importer of Russian energy.
It appears the markets are shrugging off the economic risks to the U.S. as a result of the Russia situation.
Second, the markets have fully digested the fact that the Federal Reserve will raise interest rates in March.
Stocks had been skidding on concerns of higher interest rates.
It’s clear that unless the economy falls apart in the next two week – the Fed will raise rates.
However, the situation in Russia and the Ukraine is creating greater global economic uncertainty. As a result, the Fed is likely to take a lighter touch when it comes to interest rates.
Two weeks ago, many analysts expected a 0.5% interest rate hike. Today, it seems that a 0.25% increase is far more likely.
The Fed may be more dovish than was expected earlier this year. That could mean less aggressive and fewer rate hikes in 2022.
The bottom line is that the worst news is likely in the rear-view mirror.
Today investors are looking at the S&P 500 that’s down around 9% from the start of the year. And the Nasdaq seeing a YTD decline of 14%.
Meanwhile, many previously high-flying tech stocks are down 30%… 40%… and even over 50%.
It feels to me like Thursday may have seen a near-term low for the market. And stocks may start rebuilding on a more optimistic outlook in March.
Volatility is a theme that’s going to be persistent in the stock market this year. Investors who can stomach the downturns – and put cash to work by “buying the dips” – should be able to thrive.
Onward and upward!
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Yours in Profits,
Ian Wyatt
Full Disclosure: Ian Wyatt owns shares of Facebook, Amazon, Apple, Netflix and Google.