S&P 500 plunges into freefall, hits new 2022 lows amid growing recession fears
The bullish sentiment didn’t last long on Wall Street. After Wednesday’s brief rally, US stocks fell sharply on Thursday, with most sectors selling sharply amid growing recession anxiety. As of this writing, the S&P 500 has given up all of the previous session’s gains and more, losing around 3% and setting a new 2022 low around 3,660.
Yesterday the Fed raised its benchmark rate by 75 basis points to 1.50-1.75%, making its biggest hike since 1994, but the drastic measure did not elicit a negative reaction, with President Powell having clarified during his press conference that moves of this magnitude would not be common.
By not endorsing an ultra-hawkish approach, Powell temporarily calmed some nerves, but the mood has soured again as traders begin to recognize that the central bank remains on track to aggressively remove accommodative measures. over the forecast horizon. For context, 150 basis points of additional tightening are expected for the rest of the year. This should take the federal funds rate above neutral and into restrictive territory at the end of 2022, creating headwinds for risky assets.
A restrictive monetary policy in a period of economic slowdown will become an additional drag on economic growth, increasing the likelihood of a hard landing in the medium term. Recession fears intensified this morning after interest rates on 30-year US mortgages hit a nearly 14-year high of 5.78% and new home construction in May plunged 14.4%, falling to the lowest level since April 2020, a clear sign of the difficulties for the housing sector.
Looking ahead, there is little reason to be optimistic about the outlook for the S&P 500 at this time. While bear market rallies are hard to time and cannot be ruled out, the overall trading bias remains on the downside for the world’s leading stock index. That said, the next significant drop could come soon if U.S. companies start issuing negative earnings warnings ahead of the second-quarter earnings season. Traders should pay close attention to any guidance offered in the coming days to gauge US corporate strength amid weakening GDP growth, inflationary headwinds and tighter financial conditions.
S&P 500 Technical Analysis
Wednesday’s rally was nothing but another dead cat bounce. Today, the S&P 500 is down more than 3% and broke below channel support at 3,735/3,700, although the trading session is not over yet. If prices close below this zone on Thursday, the next downside target will move to 3,500, a key floor created by the 50% Fibonacci retracement of the 2020/2022 rally. On a chance rebound, initial resistance appears at 3,810, followed by 4,000.