After gaining nearly 27% in 2021, the S&P 500, a benchmark for the broader market, quickly cooled off this year and gave a lot of those gains back. The index is now down more than 17% so far in 2022. Investors are eagerly awaiting a bottom (I know I am) after enduring a lot of pain in their portfolios this year. There have been some calls from experts and analysts that a bottom may be nearing, but no one knows for sure.
So how much farther could the S&P 500 potentially fall? Let's take a look.
Impossible to predict
As you might imagine, there's virtually no way to time a market bottom, so I wouldn't recommend trying it. In addition, we are currently in unchartered market conditions, and there is widespread dispute over whether a bottom is near.
Coming out of the heart of the pandemic, consumers are currently flush with cash thanks to stimulus and savings, and many consumers have seen higher wages as well. But inflation has soared to 40-year highs, and gas prices have also hit record levels. There is a labor shortage and Russia's invasion of Ukraine, which has complicated supply chain difficulties. The Federal Reserve is now raising its benchmark overnight lending rate extremely aggressively, and bond yields have soared. The Fed is also planning to soon start reducing its nearly $9 trillion balance sheet. Rarely in history have we seen this many conflicting factors in the economy all at once.
Because of the huge run-up during the brunt of the pandemic, even after a big sell-off this year in which the S&P 500 briefly entered bear territory, the market is still a lot higher than at pre-pandemic levels, which makes what will happen next difficult to call. Experts are widely divided on the issue.
David Rosenberg of Rosenberg Research recently wrote in an op-ed in MarketWatch that he thinks the S&P 500 could drop much further, to around the 3,300 level. One reason for this is that yields are still too high, and in the past, the end of a bear market is usually triggered by an average 1.35 percentage point drop in the 10-year Treasury yield, Rosenberg said.
Morgan Stanley's Chief Investment Officer Michael J. Wilson last week said he thinks there is still a ways to go and thinks the S&P 500 will fall to closer to 3,400, due to the chance of a recession in 2023 being much higher.
But some are getting more bullish on stocks. Tom DeMark of DeMark Analytics, who famously called the market bottom in 2020 after COVID-19 hit, recently came out and said the market is close to bottoming and then heading higher. DeMark expects the S&P 500 to sell off below 3,900 before a "shocking rally" that sends the S&P 500 to between 4,400 and 4,500. Baked into this estimate is the yield on the 10-year Treasury bill peaking and the price of crude oil heading lower as well. Meanwhile, JPMorgan Chase's co-head of global research, Marko Kolanovic, who has regularly been more bullish than most of the analyst community, recently said he thinks the stock market "can climb out of this hole" on the belief that U.S. inflation has peaked or will do so soon.
As I said above, trying to time the bottom is futile, so I will not try. But it is tough for me to feel any kind of real confidence with two half-point interest rate hikes expected at the Fed's June and July meetings, and with the Fed to soon begin unwinding its balance sheet. I'd like to get past these events.
Finding a bottom doesn't really matter
At the end of the day, finding a bottom doesn't really matter if you are a long-term investor. Markets ebb and flow, and recessions tend to happen about once a decade. But the S&P 500 has declined two or more consecutive years on only four occasions since 1929. Stocks tend to go up over the long term. Rather than worrying about when a bottom will occur, I'd focus more on finding companies that have superior business models and strong economic moats and that can produce tremendous long-term value. If they are down now, then you can buy these stocks at a discount, and in 10 years, you will be glad you did.