DO YOU THINK A STOCK MARKET CORRECTION COULD BE WORSE THAN A PANDEMIC?
STOCK MARKET CORRECTION DEFINITION
For investors, stock market corrections—a significant drop of at least 10% in the major market indices—are an inescapable part of life. In actuality, one takes place on average once every two years.
We went through one of the fastest and deepest corrections in history at the beginning of the Covid-19 pandemic. The S&P 500 dropped by 30% in a few weeks before gaining it all back within five months.
The Covid Correction teaches us a valuable lesson: don’t overcorrect when equities have a correction. Moves made in a panic merely lock in losses and forego potential rewards. The S&P 500 doubled in value over a year after the Covid Correction’s bottom, and investors who took cover likely lost those gains in full or in part.
However, it can be quite difficult to maintain composure during a correction. We’re currently experiencing a correction that perfectly illustrates the volatility of the stock market correction in 2023. When it seems like everyone around you is losing theirs during a stock market correction.
1. IT’S TIME TO SAVE MONEY
According to a recent talk on Wall Street, a stock market decline for the S&P 500 that will be worse than the epidemic is on the horizon. This increasing worry will affect the market whether or not it occurs. If you think back to 2020, the S&P 500 corrected roughly 35 percent in weeks, so we don’t believe that aim is out of the question.
The Ukraine crisis and its repercussions are the apparent cause, but the basic reason why equities fell then and why they will fall today is the same. Stocks are highly overvalued and need correction because the outlook for earnings is set to undergo a systemic re-evaluation. How much farther will they fall is the question. According to us, the market is overvalued due to stimulus spending and unmet expectations, and it may very quickly drop down to the long-term trend line, which is far down near 2,700.
2. THE S&P 500 DEPARTS RUSSIA, FUELING INFLATION WITH OIL
A growing number of S&P 500 corporations are relocating from Russia or closing their operations there. Despite not having a particularly sizable economy, Russia ranks tenth internationally in terms of GDP and contributes significantly to several S&P 500 companies. The lesson from this is that while the expectation for earnings growth in Q1 and FY 2022 was mediocre and starting to decrease before the conflict began, it will undoubtedly pick up steam now. A reduction in profits outlook, for which there is a very high chance, will, if there is one thing we are certain will, cause the market to fall.
Inflation, which is hot and very hot, is the main source of the profits outlook fall. The February CPI was published, and it performed well in both the headline and core readings and in comparisons between months and years. If the predictions of S&P 500 firms are to be believed, the readings of 7.9 percent and 6.4 percent are the greatest in 30 years and are not the end of the increases. There is talk that wages will increase by 15% in 2023, and gas and oil prices should also be considered.
Whatever the cause, tighter global supply, OPEC’s reluctance to raise production, and Russia’s capacity abandoning the market are all contributing to soaring oil and gas prices. Although we anticipate turbulence, we do not believe price increases have reached their peak. WTI and gasoline prices are about 200 percent higher than a year ago and are expected to stay high for the foreseeable future, even if they stabilize at the current levels (around $115 per barrel). This entails poorer than anticipated earnings in the first quarter and the entire fiscal year, thinner margins overall, and the potential for an economic slowdown. We recently spent $4.39 on gas; this will reduce our discretionary spending, which is bad for the S&P 500 earnings.
CONCLUSION
The S&P 500 is in a short-term decline and has a real chance of developing into a bull rout. The market has already broken over bullish resistance at the 4,300 level, and pressure is now building on the 4,200 goal close by. The market may regain momentum at this level, but we believe it will be a brief lull in trading until earnings revisions surface. The S&P 500 may bounce up to the 4,400 level, where we anticipate encountering tough resistance, assuming support holds at this level and the news grows better.