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When Will the US Stocks Bear Market Bottom?

When Will the US Stocks Bear Market Bottom?

Information is not investment advice

The economy is on the cusp of recession, suffering from high inflation and high interest rates. That eats up salaries, weakens consumer confidence, and may lead companies to layoffs. With all these tensions, stocks collapsed into a bear market.

US stocks have delivered their worst first half of a year in more than 50 years triggered by the Federal Reserve's attempt to control inflation and growing concerns about recession and global growth. So what's next for US stocks? Can they recover in the second half of 2022? 

S&P 500 ended the first half of 2022 on a bad note, declining by more than 20.6%. Wall Street hasn't seen such a painful start since 1970, when stocks saw a strong sell-off in a recession that ended what had been, by far, the longest period of economic expansion in America's history.

The technology-heavy Nasdaq Composite has lost nearly 30% since 2022. The sharp drop in US stocks has wiped out more than $9 trillion from the market value since the end of 2021, according to Bloomberg data for the S&P 500 Index. 

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Why did US stocks enter a bear market? 

1. Inflation is the theme of the year, and its harsh consequences have already affected everything. 

2. The Fed has been late and stubborn in responding to rising inflation despite all early signs that rising prices are not temporary and will persist. 

3. The gloomy mood and negative atmosphere are currently dominating the market, with the growing possibility of a recession in the US and Europe. 

4. Relying on central banks to facilitate monetary policy to support economic growth, their inability to tighten and hike rates at the right time, and their failure to control inflation. 

5. The series of rate hikes were so quick and strong that they greatly confused the markets. 

6. The Fed is insisting on continuing to raise rates to fight inflation despite the possible economic risks, even if it leads to a recession.

What awaits the stock market in the second half of 2022?

Stocks have struggled since falling into a bear market in June. History shows that the rapid pace of the market's decline this year may actually be a positive sign, with stocks poised for a rebound if the economy avoids a sharp slowdown or recession.

The good news is that the most recent bull market only took 161 days to go from its peak to a 20% decline, compared to the 245-day average in previous bear markets.

If the Fed avoids a recession as it did in the dot-com crisis (2000-2002) and the global crisis (2008-2009), this bear market could bottom out soon. How this bear market ends will depend on the pace at which inflation decreases, which will determine how long the Fed will keep raising rates and when it will stop.

What is the outlook for the S&P 500 index? 

If the Fed controls inflation over the coming months, markets will stabilize and calm. If the Fed fails, this bear market will be just the beginning.

With a soft landing scenario and stable earnings season, we expect the S&P 500 to end the year around the 3900-4200 levels. If corporate profits declined in the next two quarters and the economy entered a recession, the S&P 500 could drop below 3300.

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