History says US stock market has further to fall

Investors are questioning how much further US stocks will slide this year, after a protracted sell-off that knocked Wall Street’s S&P 500 more than a fifth below its January peak.

Fears have intensified that the US central bank will tip the world’s largest economy into recession, in a bid to tackle soaring inflation with higher interest rates. In turn, the S&P tumbled into bear market territory in recent weeks, commonly defined as a correction of 20 per cent or more from a recent high-point.

Asking whether the bottom is now in sight, Société Générale examined 56 “crisis” periods for US stock market corrections over the past 150 years — pertaining to sell-offs that have fuelled drawdowns greater than 10 per cent for the S&P 500.

Identifying 30 bear markets since 1870, the French bank said that history suggests the S&P should bottom out over the next six months at about 34 per cent to 40 per cent below its peak reached at the start of 2022.

Solomon Tadesse, SocGen’s head of equity quant research for North America, said that further declines for US equities were likely as tighter monetary policy may lead to stagflation — a combination of persistent inflation and little or negative economic growth.

Tadesse pointed out that the current correction for the US stock market is not atypical compared with history. By contrast, the speed and the scale of the rebound for Wall Street from the coronavirus-induced low in March 2020 was extraordinary.

The S&P 500 surged 113 per cent higher after bottoming out on 23 March 2020, boosted by huge injections of liquidity provided by the Fed and generous emergency public spending measures to counteract the pandemic. “The post-Covid market surge now appears highly excessive,” says Tadesse. That led to an unsustainable bubble which is now deflating, he added.

Investors may brace themselves for more volatility on the stock market until they are satisfied that the Fed has regained control over inflation — currently running at a 40-year high of 8.6 per cent.