Wall Street is pitching towards a phase called “ bear market with the S&P 500 posting a mid-session loss of 20.5% since its January peak. If history repeats itself… Badly battered since the start of the year, the New York stock market has just posted its longest series of weekly losses since the bursting of technology stocks in 2000. A last-minute rise will have everything similarly allowed the S&P 500 to avoid officially entering fundamental bear market territory, its loss from its January peak being reduced to 18.7%. This benchmark is feeling the weight of tech stocks which are also forcing the Nasdaq to sink further. It has fallen 29% from its peak in November, dragging the index into its worst disappointment since the tech stock crash of 2000.
In Toronto, Bay Street wants to be more resilient with a drop below 10%. The S&P/TSX is counting on the strong weight of the energy and other commodities sectors and on a lower valuation, with a forward price/earnings ratio below 13 times.
Surge of inflationary fever, runaway energy and commodity prices fueled by the invasion of Ukraine, aggressive interest rate hikes, distortions in supply chains, slowdown in the Chinese economy, risk of stagflation, or even fear of recession… There are many sources of concern.
Strong upward pressures on the cost of money alone play a large part in the erasure of stock prices, weighing both on corporate profitability and on the price the investor is willing to pay for each dollar. profit. From an appetite for risk at the height of the pandemic, the investor is now confronted with his degree of risk aversion. Despite its 19% decline, the S&P 500’s forward 12-month price-to-earnings ratio nonetheless remained historically high, at 17 times forward earnings, and set to be revised down with corporate profit margins currently under pressure. High pressure.
The dominant scenario holds that the S&P 500 will not be able to avoid entering the ” bear market », the expected average decline fluctuating around 30% during the episode.
According to Refinitiv data reported by the American financial weekly Barron’s, Wall Street has gone through 12 fundamentally bearish markets since World War II. They ranged between 23 days and 637 trading days, and involved a drop in the index varying between 20.6% and 56.8%. Of the 12, 9 recorded a loss of more than 25%.
Always historically, on average, a “ bear market lasts 13 months from peak to trough, and the average pullback for the S&P 500 is 33%. According to independent financial services firm LPL Financial, the average drop is 35% if the bear market is accompanied by a recession, or 24% if the central bank manages a soft landing instead.
Recession or not? In their May financial bulletin, National Bank economists believe that in the process of monetary policy normalization, the end of quantitative easing should amplify the impact of higher interest rates on growth and avoid an inversion of the yield curve, usually a harbinger of a recession. We will have to see.
Fall in confidence
In the aftermath, the surge of inflationary fever and runaway prices got the better of Canadian consumer confidence. The Conference Board index lost 11.7 points in May, suffering its biggest decline since the start of the pandemic. Their worry about future finances increased, they became more averse to spending and more reluctant to buy big-ticket items.