USA500 on the Brink of a Bear Market

After reaching an all-time high around 4800 in December 2021, supported by massive stimulus and ultra-loose monetary policy from central banks globally which helped spur the recovery of the global economy from the effects of the COVID-19 pandemic, global stock markets are broadly down this year with the US500 down about 18% year to date and on the brink of a bear market.

Massive stimulus, coupled with supply constraint – a spillover effects from the pandemic- as well as higher energy and commodity prices spurred by tensions in Europe have seen global inflation outlive the transitionary expectations from most of the central banks to highest levels in decades. Inflation in the US is now at 8.3% y/y, in Europe about 7.4%, in the UK about 9% and even Japan has seen their inflation rate more than double to 2.5% in the month of April.

Most major central banks have since entered a hiking circle, hiking interest rate at a fast pace to combat the ultra-high inflation. The Federal Reserve is now expected to continue hiking by 50 bps in their next two meetings with further hikes expected until the neutral level is reached later this year, the BOE and BOC have hiked their interest rates to 1% already, set to hike further while the RBNZ have hiked rates to 1.5% and continue in their hiking path. The ECB are also expected to hike in their June meeting while the SNB is the latest to signal possible action after SNB Chief Thomas Jordan said they are closely watching inflation and stand ready to act if it solidifies in Switzerland.

This Central bank tightening circle amid high inflation coupled with expectations for global economic slowdown as well as lockdowns in China have seen global risk sentiment dour and equity markets suffer. The US500 is on the 7th consecutive down week, US100 is down almost 30% while individual stock names are also down heavily – Apple is down 24%, Meta Platforms is down over 43% and Alphabet is down 21% this year alone. Despite the heavy downside so far in 2022, the bleeding may continue as central banks are nowhere near getting inflation under control are set to continue in the hiking path.

US500 has pared back about 30% of its gains since March 2020 and currently trades below the 4000 key level, close to its 38% retracement level -checking from the pandemic lows to its all-time high, having found slight support at 3860 this month. After clearing out key support levels at 4130 and 4030, the next level of support comes in around 3700 -the low of early March 2021. Price remains below the 20-day moving average and in negative territory on the MACD as well as RSI although it trades close to oversold region. The outlook for the US500 remains dour and considering the earlier rally from 2020, there is still room for further downside although one cannot take out the possibility of some pullback especially is we get more good news on the China COVID situation and some ease in inflationary pressure.

About the author

Heritage Adisa

As an Economics graduate, Heritage has a natural interest in how the economy works and more importantly how it relates to finance; he has pursued this interest by exploring the financial markets, seeking knowledge and earning the Capital Markets and Securities Analyst designation (CMSA) from the Corporate Finance Institute in Canada. He is also certified in the CFA’s Investment Foundation Program amongst other certifications in the Financial Markets industry. As a Market Analyst, Heritage uses inter-market analysis and market sentiment to approach the market and is dedicated to sharing his knowledge with other traders through trainings and delivering daily market analysis. He believes that patience, consistency and proper risk management are keys to successful trading.

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