Investors seek a bottom as sentiment collapses

Thoughts

• Equity investors are looking for a bottom after the S&P 500® Index experienced its first six-week losing streak in over a decade. The S&P 500 has lost nearly 16% more than one-third through the year, representing the third-worst beginning to a year on record. In the previous four worst starts (1932, 1970, 1939, and 2020), the index saw a strong return from this point through year-end, averaging nearly 20%. A decline of 20% has occurred 14 times in the history of the S&P 500, with just two (1987 and 1966) not coincident with a recession, per Bloomberg. In searching for a bottom, observers note that while markets have been weak, there are few signs of capitulation.
• Investor sentiment has hit catastrophic levels, with the CNN Fear & Greed Index touching 6 on a scale from 0-100 last week and six of the seven underlying indicators flashing “extreme fear.” The AAII survey of investors saw the smallest average of bulls (24%) this year in the history of the survey. The Investors Intelligence survey shows the fewest bulls in over six years. Despite the fear, retail fund flows have yet to hit extremes, with the “buy the dip” mentality still in play. Bank of America data shows that of every $100 invested since the beginning of 2021, only $4 has been pulled out. Institutions are a different story, with hedge funds aggressively de-risking following a period of weak performance.
• While we’re getting closer to the bottom, we’re likely not there yet. Emotion will continue to churn the market, but if your timeline is 6-12+ months history shows that this is a good time to buy.

News

• Last week’s inflation data was a reminder that while the rate of growth may have peaked, pricing pressure remains extreme. Consumer price inflation eased modestly to 8.3% from a year ago versus 8.5% in March, driven by a modest easing of gasoline prices. Pressure continues on services, including restaurants and air travel as consumers shift from big-ticket purchases to experiences. This shift indicates that supply-chain disruptions are no longer the primary pain point, and the pressure is becoming more broad-based. Inflation expectations are beginning to ease, with the 5-year breakeven inflation rate (derived from the TIPS market) below 2.90% for the first time since February.
• Economic data continues to reflect growth despite the universally negative sentiment. The NY Fed’s Weekly Economic Index is at a level consistent with economic growth of over 4%. Google mobility data shows time away from home just 2% below pre-pandemic levels, the best level since March of 2020. The University of Michigan reading on consumer sentiment dropped to 59.1 from 65.2, at the lowest level since 1991, reflecting that consumers are concerned about the economy despite continuing to spend. Expectations fell sharply, while current conditions fell to the lowest level since 2013. Goldman Sachs lowered the U.S. growth outlook for 2022 and 2023 to 2.4% and 1.6%.
• Fed officials seem unphased by the aggressive selloff in equities, further challenging the existence of the “Fed put.” Chair Powell noted that stubbornly high inflation would be the worst scenario for the economy and that orchestrating a soft landing is “quite challenging” and is likely to include “some pain.” Officials appear content with 0.50% hikes at the next two meetings, with Powell reiterating that the Fed isn’t actively considering such a move. His comments came as the Senate confirmed him to another four-year term by a vote of 80-19. Interest rates eased this week as investors increasingly price in a slowdown in growth, with the 10-year Treasury yield falling 0.21% to 2.92% this week.

What to Watch

• This week will provide a broad look at the health of the consumer, including retail sales on Tuesday, housing starts on Wednesday, and existing home sales on Thursday. Other notable releases include industrial production on Tuesday and leading indicators on Thursday.