- The S&P 500 is down 19% in 2022.
- But the market has further to fall, according to Jeff Bierman, a finance professor.
- Bierman said the index would fall another 12-22% before bottoming.
Stocks have taken a beating this year.
Since January 3, the S&P 500 is down more than 19%. And despite a summer rally that clawed back much of the losses seen through mid-June, the market is down 10% over the last month as investor consensus becomes increasingly bearish amid the most aggressive monetary tightening from the Federal Reserve in decades.
Many see a Fed pivot to dovish policy as necessary for a market bottom. But according to Jeff Bierman, who was the chief market technician at TD Ameritrade between 2007-2015, stocks will bottom before then, when inflation comes down to around 4.5%. It’s still unclear what level of inflation the Fed will deem acceptable before they are willing to ease policy again, but their stated long-term goal is 2% (in August, the consumer price index was 8.3%).
Until then, stocks have further downside according to Bierman, who’s an adjunct finance professor at both DePaul University and Loyola University Chicago.
That’s primarily because the biggest names in the market — many of which are part of the so-called “FAANG” stocks — are still overvalued, he said.
Given that they collectively make up such a big part of the market — the top five stocks in the S&P 500 make up 20% of the index — they will drag down the rest of the market, Bierman believes.
“You’ve got to break Apple, Amazon, Microsoft, Tesla, and Google,” Bierman told Insider on Friday. “They’re disconnected from their long-term valuations. Apple has a sequential drop in its sales and earnings and the stock just goes up. It makes absolutely no sense.”
“In a bear market, growth dies,” he said.
While Bierman thinks these stocks have further to fall, it’s worth noting that the five stocks he listed have already dropped in no small way in 2022. Here is the year-to-date performance of each of the stocks: AAPL (-17.2%), AMZN (27.5%), MSFT (26.9%) TSLA (24.5%), and GOOG (28.5%). All except for Apple have underperformed the S&P 500, though they are more on par with the performance of the tech-heavy Nasdaq 100, which is down 28.1% this year.
Bierman said the market bottom would also be signaled by higher levels of capitulation.
The ongoing lack of capitulation is reflected in the CBOE Volatility Index, or VIX, he said. Bierman said the index would likely spike to “well above” 40, a level that indicates more extreme levels of bearishness. It currently sits at 27.54, and tends to rise when the S&P 500 falls.
Markets Insider
When all is said and done, Bierman said he thinks the S&P 500 will bottom out somewhere between 3,000-3,300. It closed Friday at around 3,873, meaning 3,000 represents 22.5% further downside.
Bierman said he doesn’t have a particular timeline for when the above will play out, but pointed to the average bear market lasting 14-18 months.
The bigger picture
Bierman’s call for a bottom between 3,000-3,300 falls in line with those from some major voices on Wall Street.
Goldman Sachs Global Markets Strategist Vickie Chang and Senior Markets Advisor Dominic Wilson said in a note to clients this week that the S&P 500 would fall to 3,400 if a soft landing is achieved and the US economy doesn’t enter a recession. If Fed tightening causes a recession, then the index would fall to 2,900, they said.
Morgan Stanley’s Chief US Equity Strategist Mike Wilson also said the index could fall as low as 3,000 (3,400 by the end of this year), and Bank of America’s Head of US Equity and Quantitative Strategy Savita Subramanian has a 2022 S&P 500 price target of 3,600.
Others are even more bearish, like GMO’s Jeremy Grantham, who said in an August 31 commentary that “every historical parallel suggests that the worst is yet to come” for stocks. He characterized the current market as the fourth “superbubble” in the last century, and pointed out that the prior three fell at least 50%.
Most other strategists on Wall Street remain more bullish, with a soft-landing scenario being the most common base case right now.
But it still appears to be too early to tell how the current market moment plays out. Inflation stayed higher than economists had been anticipating in August, and the US labor market is still too strong to cause the Fed to take a more cautious tone.
According to Bank of America analysis or corporate earnings calls, companies are increasingly worried about a recession.
Below is the bank’s corporate sentiment index, based on the tone of the calls.
Bank of America
Here’s mentions of layoffs on the calls, for example.
Bank of America
The most recent example of negative corporate sentiment is FedEx, which has dominated headlines in the latter half of this week. Raj Subramanian, the firm’s CEO, told CNBC on Thursday that he sees a “worldwide recession” ahead and is taking cost-cutting measures.
To a degree, FedEx is seen as a bellweather for the economy, as its business model is closely tied to demand. Still, some say fears about the overall economy’s health stemming from Subramanian’s guidance are overblown.
The Fed is expected to hike rates by 75 basis points at their September 26-27 meeting, and then proceed with smaller hikes until sometime around the end of the year before pausing. The central bank has said they will then leave rates at their terminal rate instead of immediate easing.
How much these hikes begin to affect the labor market — and how much inflation comes down — will heavily dictate the Fed’s policy moves going forward. With many expecting inflation to stay relatively elevated for an extended period of time, stocks could pay the price.
“I think there are some real long-term inflationary pressures to be aware of,” said Tony DeSpirito, the CIO of US fundamental equities at BlackRock, this week. These pressures include a shrinking workforce, a costly switch to green energy, and deglobalization’s impact on supply chains and rising labor costs.
“I don’t see us going back to the ultra-low levels of inflation we saw post Global Financial Crisis,” he said.
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