According to Truist, the S&P 500 is most likely already halfway through its decline.
The week has begun with investors remaining cautious. The S&P 500 SPX ended Friday’s trading session 4.3% lower than its closing high from early December. A large portion of the blame appears to be placed on rising Treasury yields due to renewed inflation concerns.
Truist Advisory Services chief market strategist Keith Lerner, however, asserts that while such pullbacks may be unsettling, “they are the admission price to the market.”
According to Lerner, the most recent selloff is only a reset of mood and prices, which may have been stretched temporarily but still keep stocks within the bounds of a continuing bull market.
The market was left exposed by the record levels of investor confidence that were observed at the end of last year, including a high percentage of traders who anticipated that equities would hit new highs in the upcoming months. “When expectations are high, a little bad news can go a long way,” he states.
As mentioned previously, rapidly increasing bond yields are the most recent negative development. The 10-year Treasury yield BX:TMUBMUSD10Y has risen beyond 4% at “an accelerated pace” in recent years, which Lerner says has presented a threat to stocks. “It’s not a coincidence that the S&P 500’s recent peak on Dec. 6 coincided with the trough for the 10-year Treasury yield,” according to him.
However, investors should keep in mind that recent better-than-expected economic data, such as Friday’s blowout jobs report, is primarily responsible for the interest rate increase. We continue to hold the long-held belief that a stronger economy with fewer rate cuts is preferable to a weaker economy that necessitates more aggressive rate cuts. “One only needs to go back to 2000 or 2008 to see how aggressive rate cuts failed to stop recessions or bear markets,” Lerner argues.
Indeed, the increase in bond yields gives equities competition, but Lerner thinks we are just witnessing a return to the interest rate/equity link that existed prior to the global financial crisis of 2008. He points out that between 1950 and 2007, inflation was 3.8% and the 10-year Treasury yield was 6.2%. However, the S&P 500 averaged a yearly total return of 11.9% over that time.
“A resilient economy should continue to support higher corporate profits and the economy has proven to be somewhat less rate sensitive relative to history over recent years,” according to him.
Lerner acknowledges, however, that in order for the stock market to regain its magic, interest rates might need to level out. Fortunately, Truist’s fixed income strategists believe that this could happen soon because the U.S. yield spread advantage over its G7 counterparts is almost at its biggest level since 2019. This ought to draw readers to American newspapers.
However, how much longer might this most recent reversal last? The S&P 500 saw 30 drops of at least 5% since the market bottom in March 2009, according to Lerner’s calculations, despite the barometer recording a total return of 1087% over that time. Over a period of 28 calendar days, the median retreat was 7.5%.
According to Lerner, “we are likely at least halfway through this current setback already,” given that the most recent selloff lasted roughly 4% over 35 days. And he continues: “Moreover, we have also seen other areas of the market, such as small caps, down about 10% and the average stock, as proxied by the S&P 500 Equal Weight index, down 7%, suggesting a decent reset has already occurred.”
In conclusion, Truist advises investors who are underweight their target equity position to use the dip to gradually increase their holdings and to continue with the longer-term market rise. The United States is Truist’s favored location; it advocates a “modest” gold position, preferring large caps over small caps, and prioritizes technology, financials, and communication services.
