Stock Market Showing Similarities to 2022 Plunge, Caution Advised
The recent decline in stock prices is reminiscent of patterns observed during the stock market downturn in 2022, serving as a cautionary signal for current equity investors.
Over the past 11 trading days leading up to Monday, the S&P 500 has dropped in value for seven of them, resulting in a hit ratio of 36.4%—the lowest since December 2022.
Historically, when the hit ratio has been below 40%, stocks have typically experienced average losses of 6.2% over the following months, particularly notable during the period when the Federal Reserve began raising interest rates and concerns about a recession were prevalent. While this comparison may not be entirely equitable given the different economic circumstances, it adds to other signs suggesting a shift towards bearish sentiment in the stock market.
The outlook after April remains uncertain. While in the past, there have been instances where stocks either rebounded or remained stable following a period of low hit ratios, there have also been occasions where significant losses ensued.
The upcoming earnings season and movements in Treasury yields will heavily influence market dynamics. Tech giants such as Microsoft, Meta Platforms, and Amazon, which are expected to drive profit growth in the S&P 500, are set to report earnings next week, potentially providing support for stocks.
In the short term, attention is focused on the two-year yield, which is approaching 5%—a level that has historically unsettled equity markets.
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