Buy the dip or sell the ‘rip’?: What’s next as S&P 500 tests bear-market territory

Investors, who are already facing the collapse of the stock market and fear that the US economy may be heading for a recession, are now focusing on the consumer. On the one hand, discretionary consumption actions are among the most affected.

Fixing the market at maximum inflation and how often the Federal Reserve could raise interest rates is giving way to fears of recession, according to Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute.

That change was seen last week as stocks plunged amid investor concern over consumer spending trends, Christopher said in a telephone interview.

“The market is finally starting to trade in a realistic recession,” he said.

For now, the mood of consumers has proven to be as difficult to determine as the entrances and exits of the market.

The fall has been “very difficult to overcome,” JJ Kinahan, chief market strategist at online brokerage firm Tastytrade Inc., said in a telephone interview. “It’s like going in and boxing day after day, getting kicked in the ass, but they haven’t knocked you out yet. So you have to come in and box again. “

Shares have not yet experienced a “big low” and as the market is vulnerable to a rebound in the bear market, sell any “rips”, BofA Global Research’s investment strategists advised in a May 19 note. .

On Friday, the S&P 500 SPX Index
+ 0.01%
traded in bear market territory, but avoided closing in, as it made a profit on a mixed close for US stocks. However, the S&P 500 and other major benchmarks suffered another week of losses, with the Dow Jones Industrial Average DJIA
+ 0.03%
reserving an eighth consecutive weekly decline for its longest streak of losses since April 1932.

In a May 18 note, the Wells Fargo Investment Institute said it was adjusting its stock orientation and price targets for a “likely” recession, improving the utilities sector to “neutral.” of “most unfavorable.” Utilities are considered defensive, unlike the discretionary consumer sector, which Wells Fargo downgraded from “unfavorable” to “neutral,” according to the note.

Discretionary consumer SP500.25,
was the worst performing sector in the S&P 500 on Friday, closing lower and recording a seventh consecutive week of falls for its longest loss streak since July 1996, according to Dow Jones Market Data.

Reads: Retail stock issues affect consumer sector ETFs as S&P 500 approaches bear market territory

These are Wells Fargo’s equity sector preferences, as seen in its May 18 report.


“Sticky” inflation.

“Inflation is affecting purchasing power,” Christopher said. “It’s so catchy,” he said, “that he’ll be with us for a while, even after the Fed raises rates.”

Earnings are not in earnings results reported by Walmart Inc. WMT,
+ 0.11%
and Target Corp. TGT,
+ 1.26%
last week aroused investor concern because high inflation is limiting consumer spending while affecting corporate profit margins. Walmart shares fell more than 19% last week and Target fell about 29%.

Reads: Walmart Says Consumers Are Shrinking to Private Label for Items Like Dairy and Bacon

“Unfortunately, gasoline prices hit another record high in May, and with inflation ramping up in most categories, people are spending more money on fewer items,” said Beth Ann Bovino, chief economist at U.S. S&P Global Ratings, in comments emailed in May. 17.

When S&P adjusted U.S. retail sales in April for inflation, “a frightening split has emerged over the past year and only widened until April,” Bovino said.


“Purchasing power has been reduced, especially for low-income households,” he said. “While the savings stored during the pandemic have given households a pillow to absorb these higher prices, these shock absorbers are finally running out.”

While the labor market remains strong, new U.S. jobless claims for the week ending May 14 rose to a four-month high. Christopher said the Wells Fargo Investment Institute believes “a mild recession” could begin later this year.

They are not alone.

“We continue to expect that the tightening of financial conditions caused by Fed policy is likely to lead to a recession in late 2023,” wrote Deutsche Bank analysts led by US chief economist Matthew Luzzetti in a research note dated May 20th. In the last few weeks, US financial conditions have hardened sharply. “


Next week, investors will get new economic data on inflation, consumer spending and disposable income. The U.S. economic calendar also includes readings on U.S. consumer sentiment, manufacturing and services, initial unemployment demands, and the minutes of the last Federal Open Market Committee policy meeting.

Restless investors

While investors are nervous, stock market funds tend to form after a “panic sale,” and the recent fall so far has been “tidy,” according to Tastytrade’s Kinahan.

The S&P 500 has fallen about 18 percent this year through Friday, while the Dow has fallen 14 percent and the high-tech Nasdaq Composite has fallen about 27 percent, according to FactSet.

Reads: The S&P 500 narrowly avoids a bear market. How long do they last once they arrive?

Through the lens of bullish investors, bearish markets imply “wild, fearsome and dystopian price action,” BofA’s investment strategists wrote in their note. “The tape is already showing great damage,” with an “inflation shock” largely with a “rate shock.”

Once the “recession shock” is discounted, “minimums” will be set, strategists wrote, citing a bullish outlook.

Both Kinahan and Christopher of Wells Fargo warned against trying to time the market, and Kinahan described any attempt to choose a fund as a “silly order.”

Christopher said investors might consider putting small amounts of cash to work over time as the market falls to new lows and buying quality stocks to minimize losses. “If you’re a long-term investor, you don’t want to take money out of the market,” he said.

With rising recession risks, the Wells Fargo Investment Institute has lowered its year-end price range for the S&P 500 to 4,200-4,400 from 4,500 to 4,700, its report shows. This is above the close of the index on Friday at 3,901.

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