Since the World Health Organization (WHO) declared a global pandemic on March 11th 2020 the S&P 500 index grew by over 70%. At face value this exponential rise created a mismatch between economic growth and market sentiment. This is further evidenced by the U.S CPI data which came in at 7.5%, largest increase since 1982. Fear of collapse is affecting investment decisions and further upside potential is actively scrutinized by investment professionals.
S&P 500 Daily Chart
What does Goldman Sachs say about the S&P 500?
In a recent podcast, Goldman Sachs Chairman and CEO David Solomon discussed the market valuation at large. Whilst he confirms overvaluation on the basis of earnings data and implementation of policies aimed at targeting inflation pointing to further downside, he also suggested that growth stocks have experienced reasonable correction. Since then, we are continuing to see further decline in the S&P 500 index, and the answer could lay nowhere other than in the geopolitical tensions between US and Russia over Ukraine invasion. Safe haven assets are gaining more traction as investors await Putin’s actions, with the price of gold spiking by over 5% across February.
Is the potential invasion of Ukraine really the reason behind the recent moves of the S&P 500?
Analysts mostly agree that the effects of geopolitical tensions on the market are relatively short-lived. Paul Shatz, the president of Heritage Capital, claims that the decline we are seeing is hardly a result of Ukraine-Russia tension and is purely led by Fed promise of interest rate hikes and central bank’s balance sheet reduction. Accordingly, we may begin seeing recoveries in the S&P 500 towards the end of 2022/ early 2023, with the market establishing a consolidating structure prior to another bull run. Furthermore, the mini V shape spikes historically suggest that we are not yet approaching a bottom of the market’s decline.
How do interest rate hikes affect indices?
Speculations, over how many rate hikes we are yet to see, appear futile. If the market begins to show signs of aggressive downward momentum it might prove difficult for the Fed to hike further. Sharp increases could also inhibit economic growth in general. In fact, Clissold and Thanh Nguyen, NDR’s senior quantitative analyst, found that historically the speed of rate hikes determines what happens to the market, with S&P 500 showing an average of 10.5% growth following a slow-tightening cycle versus a fall of 2.7% following a fast-tightening cycle. NDR expectation of 4 or more rate hikes over 2022 and speculation of kick-starting with a 50 basis points hike suggest we are approaching a fast-tightening cycle.
So what to do when fear of a market crash is looming around the corner? Investing in commodities could be the answer as they are structurally different from traditional assets. More on this in the next article.
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Written by Katherine Szewczyk. Katherine is an active trader. She featured in Women in Trading campaign for prop firm BluFx. Follow her on twitter for more updates.
