The S&P 500’s decline this year, down nearly 18% since January, accelerated last week after Federal Reserve Chairman Jerome Powell signaled that more “pain” was ahead.
Has the market hit bottom? Bank of America Research, based on its new list of 10 signals showing whether the stock market has bottomed, says no.
The bank compiled the list, released on Friday, after analyzing “macro and bottom-up data encompassing policy, valuation, growth, sentiment and technical trends,” the researchers said.
Last Friday, only four of the 10 criteria were met. That means there are six more that need to be hit before the market really bottoms out, at least according to Bank of America’s formula.
The four indicators considered to be triggered include the rise in the unemployment rate. The latest monthly jobs report, released on Friday, showed the unemployment rate rose to 3.7% in August from 3.5% the previous month, a relatively good sign in terms of lower inflation. , as it suggests the economy is slowing.
Other positive indicators of a market bottom include the bearish-bullish ratio of major investors whose sentiments lean toward a more bearish outlook. The others were multiple bear market rallies of 5% or more (the bank says there have been two rallies of 5% or more so far), and the Purchasing Managers’ Index – a measure of the prevailing direction of economic trends in manufacturing – has improved year over year.
But six out of 10 signs are not yet favorable for a market rebound, according to Bank of America.
The Federal Reserve should start cutting interest rates, which would indicate that inflation is under control (in fact, the Fed has raised rates). Additionally, the equity risk premium, or excess returns over the risk-free rate that investors expect to take on the additional market risk, must increase by more than 75 basis points.
Additionally, the two-year Treasury yield must fall 50 basis points or more from its highs; the yield curve, a tool to help understand the bond market, must steepen; the price/earnings ratio of the S&P 500 when added to the consumer price index must be less than 20; and there must be the presence of “Buy” signals in the Bank of America “Sell Side Indicator” which tracks average stock allocation recommendations by strategists.
In Bank of America’s opinion, the market has more room to fall. And it is not known when all the signals of a rebound will turn from red to green.
Sign up for the Makeshift Features mailing list so you don’t miss our biggest features, exclusive interviews and surveys.
