What’s being said about major stock selloff

What’s up with Wall Street?

Last week was brutal with the S&P 500 and Nasdaq logging their biggest weekly percentage drops since the onset of the pandemic in March 2020.

The S&P 500 posted its third straight week of declines, ending 8.3 per cent down from its record high in January. The Nasdaq closed 14.3 per cent down from its November peak after falling into correction territory earlier in the week.

U.S. stock futures slid again Monday morning as geopolitical tensions in Ukraine slammed risk appetite even further.

Shaken by inflation, Fed policy uncertainty and Omicron, stocks are off to a rough start this year, and outlooks are turning darker.

Analysts with Bank of America see negative returns for both stocks and credit in 2022 driven by a rates shock in the first half, followed by recession panic in the second.

“Rates up and profits down = bad combo for credit and stocks,” wrote Bank of America chief Investment strategist Michael Hartnett in a recent note.

Hartnett believes the Fed is “hysterically behind-the curve” and should hike 50 basis points at its meeting this week. At the same time, lead indicators for corporate profits, such as the NY Empire Manufacturing Survey, “are starting to head south.”

“The Fed is hiking into overvalued credit and equity markets and Fed tightening always breaks something,” he wrote.

He recommends being long on volatility, high quality and defensives on tighter financial conditions.

“Winter is here” for stocks, wrote Morgan Stanley’s Michael Wilson, a long-time skeptic of the bull market, in a note. Wilson said the retreat may have further to go, amid tighter monetary policy and decelerating growth, Bloomberg reports.

However, Oliver Allen, markets economist for Capital Economics, points out that this recent setback only reversed a portion of the gains achieved during the pandemic. The S&P 500 remains about 40 per cent above its level at the end of 2019 and the Nasdaq is still about 60 per cent higher.

Bear markets typically happen during recessions or worries about an economic slowdown and though U.S. growth may be slower than expected over the next few years, Capital believes the recovery will continue at a healthy pace.

History backs their view. Stocks have risen at an average annualized rate of nine per cent during the 12 Fed rate hike cycles since the 1950s and delivered positive returns in 11, Bloomberg reports.