December has brought a rude shock to many investors in the stock market. The seven-week rally sucked them, and now they have to deal with the S&P 500 index going down in a long stretch.
The longest downward trend at the beginning of a month since 2011 is not surprising to the Chief investment officer at American Century Investment Management. Rich Weiss, who heads the multi-asset strategies, said that moment of truth has arrived for the bulls obsessed with Fed’s interest rate policies.
Slowing Rate Hikes by Fed
The S&P closed lower Wednesday, and they have been seeing losses since November 30, when Fed Chair Jerome Powell signaled the slowing of interest rate hikes. The index had surged 14% over the seven weeks rally despite weak data in the manufacturing and housing sector before the latest climb down.
Weiss sees the current thinking of buying at dips as influenced by memories of the prompt central bank-induced recovery during the pandemic. Many investors are conditioned, often ignoring the equity’s shaky foundation.
The rally in S&P 500 index since October was in variance from the bond market as calls for recession grew louder and the long-term yields in treasury fell compared to short-term debts. The forecast earnings over this period also turned negative compared to analysts’ data compiled by Bloomberg in September that estimated a 55 growth for all the quarters.
A consumer price index is due next Tuesday ahead of the final policy meeting by Federal Reserve for the year.
The S&P 500 index drop of 3.6% in five trading sessions was more broad than deep; this retreat is seen every month in 2022. Despite the pullback, the S&P index hovered around its 200 days daily moving average. The threshold will be watched keenly to gauge the trend of the market.
The persistent weakness is rare for a month seen as the most favorable for stock buying in the calendar year. Apart from 2011, 1996 was another year when the S&P index started December month with losses.
Looming Threats
From JPMorgan Chase & Co to Stanley Morgan, strategists have warned that the bear market has not run its entire course. The threat of a tight monetary policy from the Fed and contracting corporate earnings remains.
Strategas Securities LLP’s Chief Investment Officer, Jason Trennert, said investors are positioning themselves based on a dovish Fed policy. His team studied the monetary cycles and found after the first rate cut by Fed, the S&P 500 index fell in all except one cycle, and the index fell 24% on average before it bottomed out.
Stocks do not track fundamentals closely, but their price does not deviate from earnings in the long run. S&P 500 index is now trading at a price-to-earnings ratio of 17 times the multiple and roughly aligned with the 10-year average. This earning multiple is alarming to investors like Weiss, who sees the treasury bonds’ 10-year yields as doubling over the same period and with recession for corporate earnings looming large despite Fed’s pivot.
