Has The Stock Market Bottomed Out?

Feb 27, 2024

Introduction

In recent months, the stock market has been turbulent, causing a ripple of nervousness among investors as prices experienced a significant decline. The prevailing question on many minds is whether this descent marks the elusive lowest point or if further challenges lie ahead. As we embark on this exploration, it’s crucial to acknowledge the prevailing mainstream view before unveiling the distinct perspective of the Tactical Investor.

The mainstream view, widely disseminated by conventional financial wisdom, often paints a picture that may not align with our contrarian approach. The tide of consensus, echoed by mainstream media, tends to mirror the collective mindset of the masses. Herein lies the dichotomy – the Tactical Investor’s unique perspective draws from Mass Psychology and technical analysis, offering an alternative lens to interpret market dynamics.

Recent Market Declines and the Lingering Question: Has the stock market bottomed out?

The S&P 500 index has dropped over 15% since the beginning of this year, marking an official bear market. However, the story behind the numbers reveals troubling economic trends that have investors wondering how further the market fall could extend.

Nearly every industry has been hit hard, but technology stocks have felt the most pain, with the Nasdaq tumbling over 25% from November highs. These steep losses were initially triggered by inflation, driving the Federal Reserve to accelerate interest rate hikes at a pace not seen in decades. As borrowing costs rise rapidly, expensive growth stocks reliant on future earnings are penalized the most in valuation adjustments.

The pullback has been widespread, yet the speed and ferocity of the tech wreck, in particular, raises eyebrows. During economic uncertainty, companies without consistent profits tend to get destroyed first as risk appetites fade. With inflation still running at over 8% annually, the threat of recession is rising as the Fed fights to gain control of consumer prices.

The uncertainty around how high rates must go to subdue inflation and the potential economic damage lie at the heart of investors’ unease. Some indicators already signalled stress, like weakening consumer sentiment and cooling housing data. Yet other areas, like the robust jobs market, continue powering ahead, complicating recession calls.

With such mixed signals, market participants wonder how deep any economic slowdown may materialize. A mild downturn curbing inflation without significant job losses could stabilise stocks sooner. However, a harsh recession risks further eroding corporate earnings and damaging balance sheets strained by higher borrowing expenses.

Until inflation shows clear signs of peaking, the Fed will likely remain aggressive to nonchalant even at the cost of economic harm. However, markets are forward-looking and may bottom in anticipation of slower tightening before economic recovery takes hold. This disconnect means attempting to catch the ultimate low is a risk-fraught guess.

The burning question remains whether the current bear market has exhausted itself. While recent selling has been intense, paring year-to-date losses have proven elusive thus far. Selloffs of such speed and scope have historically tended to overshoot to the downside before finding a bottom. With so many crosscurrents in play, clarity on how much farther stocks have yet to fall still seems a way off.

Factors Pointing to Further Declines and Lingering Uncertainty around Whether The Bottom Is Here

Despite the S&P 500 plummeting over 20% since the start of 2022, some market observers remain wary that further weakness lies ahead. Various risks persist that could prolong the current bear market and drive stocks to retest their lows.

Chief among concerns is inflation, which continues battering households without signs of decisive retreat. While some commodity prices like oil have eased, the overall CPI print rose 8.6% in May, squeezing consumers as wages fail to keep pace. The ongoing price pressures show the Fed still has its work cut out to anchor inflationary expectations through substantial rate hikes.

Indeed, Fed officials have signalled that they expect to maintain a restrictive policy stance deep into 2023 and beyond, as bringing inflation down remains the single priority. This duration of restrictive monetary policy elevates the chance of unintended consequences like an overtightening that deepens any economic downturn.

Even a mild recession could spell trouble for earnings. Consensus estimates assume profit growth will continue unabated, but these may prove too optimistic if demand wanes. Industries like housing-linked stocks would first feel the brunt of receding activity before ripple effects spread. If earnings revisions grow decidedly lower, fundamental valuations using forward estimates may not yet fully reflect deteriorating profitability.

Furthermore, geopolitical tensions, from the Russia-Ukraine conflict to emerging headwinds in China, maintain an uneasy backdrop globally. While such issues don’t directly drive markets, they introduce uncertainty that amplifies volatility. Without resolution, sustained optimism cannot take root.

Considering all these mitigating circumstances, some professionals in the sector argue that selling may have to run further before stabilizing. While over 20% declines have likely priced in much bad news already, risks remain that could easily trigger another leg down before brighter days return. Only time will disclose whether the bottom is truly in sight or if more turbulence lies ahead. Continued vigilance seems prudent, given the present uncertainty.

Some Factors That Could Point to a Bottom Forming and Signal the Market May Have Finally Bottomed Out

While downside risks remain plentiful in current volatility, not every analyst is convinced the carnage will continue indefinitely. Some experts note glimmers that suggest attracting buying interest and gaining stability may be on the near-term horizon.

For one, the S&P 500 has now retraced over 20% since January highs. Such depths of selloffs in a short span have already discounted a great deal of negative news regarding soaring inflation, recession potential, and the associated pain for corporate profits and economic activity. Ever-diligent optimism may now see value for long-term investors in a cross-section of companies trading at tangible price discounts to fundamentals.

Additionally, while the inflation picture remains largely undesirable for policymakers and households alike, some commodity prices have started receding in a way that could foreshadow softening cost pressures. Both oil and certain industrial materials have backed off highs, sending tentative signals that snarled supply chains may be gradually untangling. If goods inflation proceeds to moderate further, it mitigates some of the imperative for the Fed to tighten forcefully.

The jobs market also highlights an area of ongoing robustness – a telling sign for any economy. As long as unemployment stays low and employers remain desperate to hire in this tight labour environment, even amid demand volatility, it supports consumption and bolsters the argument that the downturn may avoid morphing into something uglier than a mid-level recession.

Entry Opportunities vs. Remaining Cautious: Views on Whether Now Is the Time to Buy or If It’s Still Too Early

Navigating turbulent equities requires carefully weighing opportunities against prudent risk management. On the one hand, significant share price retreats across many industries have undoubtedly thrown up attractive valuations for long-term investors. However, others caution against acting too hastily, given the remaining risks of turbulence.

Bulls argue that with the S&P 500 already down over 20% since the start of 2022, much pessimism regarding growth and profits has likely been priced in. From this perspective, certain companies now trade at tangible discounts to their future cash flow potential. Dollar-cost averaging into such perceived bargains currently could attain favourable average cost levels.

Nevertheless, bears maintain signs of stability and have yet to materialize conclusively. Elevated inflation, unknown Fed tightening trajectory, and looming recession danger justify judicious patience. Index support breaks and technical indicators like the stochastic oscillator must signal oversold conditions reversing before new capital can reasonably expect an upside.

A middle ground considers gradual purchases alongside wait-and-see monitoring. Cash-heavy investors may feel comfortable initially seeding select positions or sectors viewed as durable through cycles. However, overcommitting too early risks catching a falling knife if the decline proves more protracted.

Has the Stock Market Hit Bottom: Insights from The Tactical Investor

So far, we have examined the prevailing consensus, but our perspective on whether a market has hit bottom diverges significantly. In a nutshell, when a market experiences a significant correction or crash from a long-term standpoint, we see it as a buying opportunity. Allow the chart below to illustrate this perspective – sometimes, a chart speaks a million words.

This long-term chart effectively dispels any concerns about the narrative surrounding whether the market has reached a bottom or not. Any investor with the foresight to use firm corrections or so-called crashes to buy top stocks would have profited significantly, making out like “bandits.” Therefore, the primary focus should be building a portfolio of high-quality stocks before market pullbacks occur. This way, when they do, you’ll be well-prepared to act and potentially seize opportunities like a savvy “bandit” of the financial world.

Lost Opportunities in Market Crashes: A Contrarian’s Guide to Success

In the world of investing, the fear of market crashes often grips the minds of the masses. Many await the next big crash, believing it to be a golden opportunity. However, this mindset can be flawed, and the real opportunities might pass them by during the bullish market phases.

The mainstream narrative often focuses on market crashes as the ultimate chance to profit, but history tells a different story. More significant wealth is usually generated during bull runs. Contrarian investors understand that while it’s possible to make money by shorting the markets, the natural riches lie in embracing the optimism of a bull market.

Mass psychology plays a crucial role in this scenario. The masses, often influenced by fear, panic, and the desire to time the market, tend to make hasty decisions that lead to losses. Their track record of repeated mistakes, from the Tulip Mania to the housing bubble, underscores this point.

A contrarian approach is critical to navigating this. It involves analyzing historical market data, studying how the masses reacted during previous market panics, and drawing valuable insights. Looking back at significant crashes, such as 1929, 1987, the Dot-com bubble, and the 2008 financial crisis, provides information.

The old saying goes, “Those who don’t learn from history are doomed to repeat it.” To avoid falling into this cycle, contrarian investors understand that true success comes from aligning with the prevailing market sentiment and being prepared to capitalize on opportunities throughout the market’s ebbs and flows.

Embracing the Madness: Mastering Market Cycles and Mass Psychology

Market swings aren’t mere fluctuations; they’ve calculated opportunities for those who discern patterns in the chaos. The disciplined investor stands apart, wielding strategy over emotion as the masses sway between fear and greed. When downturns hit, the impulsive scatter, blinded by fear, while those with insight recognize prime moments to acquire undervalued assets. The history of cycles, from the dot-com bubble to crypto surges, offers one timeless lesson: profit belongs to those who master mass psychology and market cycles.

To thrive, investors must transcend their emotions. Embrace the hidden rhythms of accumulation, markup, distribution, and markdown phases. Recognize the quiet promise of accumulation, when few notice potential; seize the gains in the markup phase; and know when to lock in profits as the masses rush to join the frenzy. Then, as the inevitable markdown comes, stand prepared, knowing that each dip is but a prelude to future opportunity. With a keen understanding of human behaviour and cyclical patterns, investors hold the key to unlocking enduring success, not merely reacting but manoeuvring with the calculated precision of a strategist.