It's quite possible for equity investors to get a temporary reprieve in the upcoming week after the markets have been in the midst of a downward spiral since the end of March 2022. Most major indices gained momentum on Friday and ended the last week with reduced losses as buyers went bottom-fishing to buy stocks at a lower multiple.
The S&P 500 index rose over 4,000 on Friday after touching 3,858 a day before. The tech-heavy NASDAQ index surged almost 4% on Friday but still ended the week 2.8% lower. Similarly, the Dow Jones gained 1.5% on Friday but lost 2.1% last week. Global investors lost an astonishing $11 trillion in the week ended on May 13, marking the worst week since the financial crisis of 2008-09.
According to technical analysts, the rebound has the ingredients to last another week. The bounce-back will most probably be led by tech stocks that are down around 70% to 80% from all-time highs.
Further, the Federal Reserve will not be meeting for the next few weeks which might support the rally in the equity market. Market participants have been sweating over the central bank’s decision to raise interest rates several times which might offset inflation but result in a delay in economic recovery. However, Jerome Powell, the Chairman of the Federal Reserve is scheduled to speak at a conference hosted by the Wall Street Journal on Tuesday.
Equity markets expect interest rates to rise by 0.5% each in June, July, and September. Any upward deviation will lead to a sustained sell-off in indices all over the world. The Fed has already raised interest rates by 1% in 2022.
In the next week, the economic calendar will include retail sales data for April as well as a survey by the National Association of Home Builders. Retail giants such as Walmart (NYSE: WMT), Target (NYSE: TGT), and Home Depot (NYSE: HD) will also be reporting quarterly results this week and will provide a peek into the metrics such as inflation and consumer spending.
The S&P 500 is close to entering a bear market
Despite the spike on Friday, the S&P 500 is trading precariously close to a bear market. It is trading 16% below record highs which is just below the bear market territory which marks a decline of 20% from all-time highs.
A key reason for the one-day surge in the stock markets can be attributed to slowing bond yields. An unrelenting run-up in interest rates saw yields touch a multi-year high of 3.2% before closing the week at 2.93%.
In an interview with CNBC, the chief investment strategist at Leuthold Group stated, “I think what’s most encouraging to me is the rate rout has stopped. All year long, short-term yields have been pushing up the 10-year yields.”
The reduced pressure of rising interest rates might lead to a recovery in stock markets. In 2022, increasing yields have already impacted housing sales due to an increase in home mortgages.
Additionally, growth and tech stocks have been among the worst hit as an inflationary environment and higher rates will impact earnings as well as revenue in the near term.
In addition to interest rates and inflation, companies are wrestling with a range of macro-economic issues such as supply chain disruptions, rising commodity prices, and much more.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
