U.S. stocks closed mixed after dipping into bear market territory with the S&P 500’s fall from its January high, hitting 20% at one point before some late buying took it to flat for the day.
The poor results from Target and Walmart added pressure to an already weak market, highlighting inflation and supply issues that have plagued the economy for some time.
The conversation is now about the possibility of a recession at the end of the year or early 2023.
Federal Reserve Chair Jerome Powell, in his most hawkish remarks to date, said the U.S. central bank will keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat.
For the week, the Dow Jones average fell 2.9% for its first eight-week losing streak since 1923, while the S&P lost 3% for the week and the Nasdaq dropped 3.8%, with both posting seven-week losing streaks.
Here are the closing levels on Friday, 20th May 2022: –
At this point, we need to try not to read too much into the buying we saw just before the close.
While it was a good sign that we rejected the lows and stayed away from the bear market for the S&P, it’s hard to put too much faith in late buying before the close on a Friday.
However, it could be profit-taking for shorts or it could be dip buyers, and we just can’t be sure if it will continue next week.
If we look at the 10yr yields, we may also find some comfort that we are well below the 3% mark. But with the 5yr yields at 2.80 making the curve inverted, it could be that the market is pricing in a recession which is not good for stocks.
Meanwhile, sentiment will continue to be weak and volatility will continue to stay elevated.
There are more calls about the market being oversold and valuations are starting to look cheap. Dollar-cost average buying will start to make its way into the market.
To add, China’s reopening may provide some support, but I think it is more important what the expectations from the Fed and Powell will be going forward.
At the end of the day, we need to hold off from breaking the lows we saw on Friday, if we are going to avoid another weekly drop. If we do break below, things could get ugly.
Source: CBOE, Bloomberg, Federal Reserve
This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.
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