Is the US500 bouncing back from a US recession already? Here are five factors to watch as the S&P 500 powers up for recovery
By Joseph Toppe
Updated
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Wall Street traders are keeping an eye on the S&P 500 (US500) and the bear market rallies predicted down the road, despite the likelihood of economic recession and lingering inflation.
In an interview with Capital.com., David Russell, VP of market intelligence at the Tradestation Group in the US, said “At a time like this, it’s very difficult for investors to buy individual stocks.”
“In the early stages of a rebound, it makes the most sense to focus on the broad market index,” he added. “As rallies take shape, traders can look for where the relative strengths will be.”
S&P 500 (US500) price chart
Over the past five days, the broad market index has rebounded and is showing a one-month gain of nearly 6.5%. However, the benchmark remains down 3.37% the last three months and is 12.82% below the redline year-to-date.
Here are five factors traders should consider as they weigh the outlook for the S&P 500.
What is your sentiment on US500?
Factor 1: The market leans forward
Russell said: “Investors don’t care about recession or backward numbers, because the stock market is always looking forward.”
“Like Wayne Gretzky, Wall Street wants to skate where the puck is going to be and not where it was,” he explained. “There are signs inflation is cooling and the business cycle is slowing, allowing the market to catch up and begin looking forward.”
Year-to-date, the Dow Jones Industrial Average (US30) is down 9.93% but has moved 4.29% into green territory the last month, while the tech-heavy Nasdaq 100 (US100) remains 18.89% below the redline year-to-date but has improved 9.32% the last month.
Nasdaq 100 (US100) price chart
Factor 2: Volatility equals opportunity
As the threat of additional rate hikes linger and investors lean risk-off under a bearish trading environment, volatility on Wall Street is expected to continue.
In an interview with Capital.com, Michael Sincere, best-selling author of Understanding Stocks and Understanding Options, said “We are in for a choppy market for quite a while, at least until the bear market is over.”
“While recessions and inflation impact consumers and investors, experienced traders will use a negative market environment to buy stocks that are on sale,” he continued. “For traders, volatility and getting a good price is more important than the current economic environment.”
Factor 3: Inflation and rate hikes
Last month, the US Federal Reserve announced it would raise interest rates once again to curb the four-decade-high inflation rate, going up 0.75% to an overall range between 2.25% and 2.5%.
“We’ve gotten through the initial phase of the Fed turning the screws on the market and are nearing the end of their aggressive hawkishness,” Russell said.
“So, investors can now take a longer-term view and begin assessing opportunities in areas they haven’t looked for a long time,” he added. “While August is a relatively low volume month, moves can be bigger, and with momentum coming out of July, this could be another strong month.”
Factor 4: Growth stocks
Because the US Federal Reserve is expected to relax its hawkish strategy in the future, there will be another chance for traders to enter the growth sector.
Typically, speculative companies can be a gamble during economic downturns or recession, while Utilities (XLU) stocks in water, gas, and electric remain in high use and are often a haven for investors.
Utilities (XLU) price chart
Russell said, “Growth stocks, on the other hand, have a lot of secular growth, and companies like Microsoft (MSFT) and Apple (AAPL) still hold significant opportunities.”
“When you consider Apple’s iPhone upgrade cycle and Microsoft’s cloud migration, the future doesn't look so bad, making it easier to be bullish in the near term and speculate.”
Apple (AAPL) price chart
Factor 5: Bear market rallies
While a bearish market environment has forced many investors to the sidelines this summer, trading small is predicted to continue as rallies and selloffs come and go.
“There will be bear market rallies as we start to recover,” Russell said.
“At the same time, traders should be careful assuming the weakness and volatility of the first half will continue into the second,” he cautioned. “As the broad market recovers and investors begin looking long term, individual stocks and rallies will surface as opportunities.”
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