Have Stocks Bottomed?
We asked three market strategists for their view on whether the worst is over.
There's one big question on the mind of stock investors these days: Are we out of the maw of the bear market?
We asked three strategists whether the stock market has seen its lows. Their answer: Yes. That’s not to say the worst is behind us from an economic standpoint.
And the market will likely stay volatile until it becomes more clearly established that inflation is abating, consumer sentiment is improving, and the economy is showing steady growth. But the worst is likely behind us in the equity markets.
The stock market has roared back to life since reaching a low this year on June 16. The Morningstar US Market Index has rebounded nearly 16% since mid-June and is now down 11.85% for the year. The Nasdaq Composite has risen 20% from its mid-June lows, which places it in a new bull market by one widely held definition. The tech-heavy index is now down 18.31% for the year.
Animal spirits are running high as the Federal Reserve Board's moves to tame inflation have gained traction. Companies delivered better-than-expected second-quarter results given the challenging environment. The Federal Reserve Bank of Atlanta’s GDPNow economic growth tracker is forecasting 2.5% growth in the third quarter, after two straight quarters of economic contraction.
Back-to-back inflation reports on Wednesday and Thursday showed prices declining in July from June, unleashing a wave of euphoria among investors and driving benchmark indexes to their highest levels since spring.
“June probably does represent the low in the equity market,” says Jack Manley, global market strategist at J.P. Morgan Asset Management, with $2.5 trillion under management. “But it won’t be a straight ride back and we anticipate more volatility. Who would have ever thought a reading of 8.5% on CPI would be a celebrated metric?”
Manley says “we’re not out of the woods yet” and he’s watching some key data points that will support a steadier upward trajectory in the market. The top of his list includes:
There’s no question the markets bottomed in June, says Morningstar’s chief U.S. market strategist David Sekera, although he expects volatility to continue as investors keep having outsize reactions to data points. “The economy is on its way up and jobs are being filled at a healthy rate,” he says. “We were in rare territory in how undervalued markets had become.”
The four headwinds Sekera’s identified as having the most negative impact on the stock market have begun to dissipate. Those headwinds are now turning into tailwinds, he says, and include:
After buying trillions of securities to support the economy during the pandemic, the Fed is now in the process of reducing the amount of assets on its balance sheet, a process referred to as “quantitative tightening.”
Scott Clemons, chief investment strategist for Brown Brothers Harriman’s private banking division, with $60 billion under management, says he is “increasingly convinced we have seen the bottom.” What created a lot of downward pressure on the markets earlier in the year was anxiety-driven by whether the Fed was too late in combating inflation and, once the central bank began, was it too slow.
“It seems the fever surrounding the Fed moves has begun to break,” says Clemons.
Data he is watching closely for further confirmation that the upward turn in the stock market will last includes:
“If inflation ticks down and we get relief on consumer sentiment, that could spark a powerful rally,” says Clemons.