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<\/a><\/p>\nFanning the flames of the downturn is the consensus that sky-high inflation will require a more aggressive response from the Fed to be brought under control, in turn dragging down US economic growth.<\/p>\n
Money markets now see the central bank\u2019s terminal rate at 4% for the first time, and are pricing for it to get there by the middle of next year. Certain pockets of the market see the Fed going to great extremes this week, with some banks not ruling out a potential 100 basis-point hike.<\/p>\n
At 3,750, the S&P 500 now trades at just over 15 times its estimated profits for 2023, toward the low end of its valuation range over the last decade. In better times, that might breed confidence that an end was in reach to the selling.<\/p>\n
With emotions ruling markets right now, it\u2019s precious little to base a bull case on.<\/p>\n
Strategists and chartists say they are looking for heavy volume, a spike in the Cboe\u2019s volatility gauge, gappy moves in equities and surrender on behalf of the retail-investing cohort.<\/p>\n
Stocks will have a tough time rebounding without the VIX hitting 40, a level Evercore ISI strategist Julian Emanuel says will mark a \u201ccathartic flush-out.\u201d The volatility gauge rose above 34 Monday.<\/p>\n
Trading volumes on US exchanges topped 15 billion shares Monday, 3 billion more than the average so far this year.<\/p>\n
Dave Lutz at JonesTrading, meanwhile, keeps a \u201ccapitulation list.\u201d He\u2019s starting to see more panic, and is watching for whether the VIX hits 38, a level it reached in February.<\/p>\n
The ratio of puts to calls on the S&P 500 has approached its highs for the year, another sign that a potential washout of bearishness is near. On the other hand, a measure of relative strength on the index sits at 32, above the level that would indicate an oversold condition.<\/p>\n
Monday\u2019s session also marked a \u201cbig drawdown\u201d day with extreme breadth, Lutz said. All but five stocks in the benchmark index fell. Retail investors, meanwhile, are \u201cstarting to take enough wounds. They are definitely getting scared,\u201d he said.<\/p>\n The selling at the start of the week was relentless. Energy, the year\u2019s best-performing sector, lost more than 5%, its worst session in more than a month.<\/p>\n All the nervousness about the Fed\u2019s moves has revived recessionary warnings from economists who see the Fed raising rates at a pace that won\u2019t allow the economy to elude a downturn. Morgan Stanley\u2019s chief executive officer said he sees the risk of a US recession at about 50%.<\/p>\n \u201cIt\u2019s going to be a recession,\u201d said Victoria Greene, chief investment officer at G Squared Private Wealth. \u201cIt\u2019s funny we still have recession deniers. I don\u2019t see how it doesn\u2019t drag into a recession just because of the drastic steps the Fed is going to have to take.\u201d<\/p>\n This year\u2019s bear market reached its designation quicker than average. The S&P 500 typically takes 244 days to fall 20% from its peak, according to Bespoke Investment Group.<\/p>\n The current one took just 161 days. And in more than half of the 14 bear markets since World War II, the index reached a low within two months of crossing the 20% threshold.<\/p>\n Monday\u2019s break below 3,850 for the S&P 500 could be just the beginning of even more precipitous selling that could take the index to 3,200, or more than 30% below January\u2019s highs, according to Lori Calvasina, head of US equity strategy at RBC Capital Markets.<\/p>\n That would be \u201cin line with the average recession drawdown in the S&P 500 peak to trough since the 1930s,\u201d she wrote in a report.<\/p>\n Calvasina also notes that such a decline would be analogous to the Covid selloff in early 2020, \u201cmaking us think this is a reasonable starting point for thinking about how low the S&P 500 could go this time in a recession drawdown.\u201d<\/p>\n Elsewhere, though, Saira Malik, CIO at Nuveen, sees opportunities in growth stocks. The cohort suffered losses through May that were five times larger than those seen by its value peers.<\/p>\n Price-to-earnings multiples for growth and tech look potentially more \u201cinviting,\u201d and though inflation moderation remains elusive, a plateau may soon be in sight. \u201cTough times for growth stocks continue, but we see glimmers amid the gloom,\u201d she wrote.<\/p>\n<\/a><\/p>\n