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Stock Market Forecast For Next Six Months Holds Big Risks For Dow Jones — But Hope Too | Investor&039s Business Daily

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The stock market took a beating in the first half of 2022. It is now hitting new lows since fed chairman jerome powell’s decision to raise interest rates more aggressively, leaving equities with sobering losses so far 16% to date. dow jones at 21% for the s&p 500 index and 30% for the nasdaq hi-tech.

but the stock market forecast for the next six months offers glimmers of hope. while the us With the economy showing signs of weakness and the global economic and geopolitical outlook is bleak, stocks have the potential for a surprising comeback.

There are many factors at play and investors should be prepared to protect themselves in what is sure to be a choppy and volatile market. With the risk of a recession rising, things could get worse for the stock market before they get better.

the dow jones industrial average and other major indices have been hit hard so far in 2022. several rally attempts raised hopes that the pain would end. in fact, the ibd market outlook changed to “uptrend confirmed” four times amid recovery attempts, but each time they fizzled out.

“So far, the year has seen a market that has struggled to price in some of the worst case scenarios when it comes to both inflation and monetary policy,” said chief stock market strategist nationals, art hogan.

The main stock indices are not the only ones that have had problems. Small caps have been slaughtered, with the Russell 2000 sinking 25%. The trailblazing IBD 50 ETF (FFTY), a key gauge for growth stocks, has plunged 41%.

why the stock market could rally in the next six months

On a historical basis, time is on the side of the stock market. CFRA Chief Investment Strategist Sam Stovall cites a clear precedent for the stock market to retrace its losses.

“In 2021, we had more than a 20% price increase,” Stovall noted. “And in each of the 20 years since World War II that we had an annual gain of 20% or more, the market then went into a slump averaging about 11%. Most of the time the drop started in the first quarter, that’s exactly what we have this time.

“If there’s a silver lining to that historical data,” he said, “it’s that any of the observations where the decline started in the first half of the year, we came back to break even at the end of the year every time.”

stovall acknowledges that this year’s deep drop makes recouping all losses more difficult to achieve.

but hogan thinks we’re closer to the end of the stock market sell-off than the beginning.

“the s&p 500 index can certainly end the year higher,” he said. “I think we’ve done a pretty good job of pricing some of the worst-case scenarios we’re concerned about that might not come to fruition.”

He sees three catalysts that could push stocks back from their lows: the end of the Ukraine-Russia conflict, China reopening in earnest of its “zero covid” lockdowns, and inflation running itself out.

hogan currently has a year-end target for the s&p 500 of 4,800, which would be a return of about 30% from current levels.

has less hope for the nasdaq. while he thinks he could make up some lost ground, he thinks he’ll end 2022 with a decline in “high single digits, low double digits.”

edward moya, senior market analyst at oanda, also believes the stock will be gone before the end of the year.

“U.S. equities should pick up their pace before the end of the year as wall street will soon start to fully price in the Fed adjustment. the s&p 500 could struggle as spending on services will exceed goods purchases, but it should recover much of this year’s decline,” he said. “the nasdaq is likely to see a big rally led by the mega-cap giants. the nasdaq is down more than 30% for the year and could recover about half of that drop.”

factors affecting the forecast of inventories for the next six months

but history is an imperfect guide. The current challenging conditions could get even worse if the economy slips into recession, which is now more likely as the Federal Reserve moves to raise rates more aggressively than before.

Furthermore, the second year of President Joe Biden’s term comes with troubling historical baggage. Since World War II, the second year of a presidency has brought below-average stock returns of about 5%, Stovall says. this compares with an average gain of 9.2% in all the years since.

“We are experiencing decline as history said we would,” he said. “we’re getting more volatility. now the question is has the market factored in all the concerns about the federal reserve and so on with their peak to trough decline or could there be more down the road. i’m of the mindset there will probably be more forward.”

david ryan, former hedge fund manager and protégé of ibd founder william j. O’Neil, too, is in the camp that sees continued struggles ahead in the stock market’s forecast for the next six months. he points out that bear markets typically take three legs down before bouncing.

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“I expect at least another move down in the second half of the year, and then maybe when we get to October, that will be, from the top of the s&p 500…about nine months” , said. . “Most of the time, bear markets, the shortest ones, last nine months. The longest ones will continue for about a year and a half.”

He also points out that it is getting harder and harder to find pockets of strength.

“I think it will continue to be difficult because we are almost running out of (industry) groups,” he said. “We need to get some new and new names, new new groups that are doing well. They’ve really been running a lot of the same groups, especially since the beginning of the year. You look at the industry group rankings and it’s all related to oil and gas. .”

inflation forecast and stock market

Some investors may fear that the current situation is similar to what they suffered in the 1970s, when Federal Reserve Chairman Paul Volcker unleashed huge interest rate hikes to quell runaway inflation.

The fed funds rate peaked at 20% in June 1981. While this caused a recession, it also brought inflation under control and ushered in an era of unprecedented economic growth.

Inflation had been in double digits for nine years when Volcker took the helm. the United States. It was also going through crises, including two oil embargoes and price control measures invoked by the Nixon administration. on the contrary, the current inflationary spiral is relatively short-lived.

CPI inflation chart

“paul volcker really had a big job on his hands and raised the fed funds rate to 20% to eliminate what was then 14% inflation. if that sounds like today, i’m looking at the wrong data” . hogan said.

points out that volcker would raise rates 2.5% in one fell swoop, and the first thing he would find out was when banks raised their rates the next day. Investors today are blessed with a plethora of information, including bank minutes, senior bank officials speaking to the media, and post-meeting press conferences.

“No one has to guess what our federation is doing and what it’s thinking about,” Hogan said.

what investors should do in a bear market

So, with all the risks hanging over the stock market’s forecast for the next six months, what are investors to do? cash is often considered dead money. at the same time, protecting one’s capital by protecting it from vicious withdrawals is the hallmark of the exceptional stock market investor.

ryan, who is three times American. investing championship winner, said he is currently mostly in cash.

“This is not the time to take a lot of risk and be 100% invested. Investors need to be extremely selective about where they go,” he said. “I would be very defensive and take the cash and wait.”

other steps stock market investors can take now

While it’s easy to switch off and focus on other things when stocks are in trouble, it may actually be the best time to become a better investor.

“When it’s hard to make progress in the market, this is a good time to look at what you did in the previous market,” Ryan said. “Learn from your mistakes, look back over the last year and a half and see where you made your money, where you lost your money, and you’ll learn more about where you’re doing well in the market by studying your own mistakes than listening to anyone else.”

recommends that you study when you bought stocks, where you sold them, and where you took losses that are unavoidable for the active investor. eventually you should see patterns emerge.

He also says that another thing investors can do in a bear market is build a strong watch list of stocks that are showing relative strength. These are the stocks that are not falling as much as the broader stock market or are even making some gains. the watchlist can prepare you to capture new leaders when the next market uptrend begins.

tech stocks could be key to stock market forecast for the next 6 months

So far in 2022, previously high-flying stocks have been wiped out. The Invesco S&P 500 Equal Weight Technology ETF (RYT) is down more than 27% for the year.

The ark innovation etf (arkk), a proxy for riskier speculative technology, has plunged about 59% this year. it is more than 70% below the all-time high it reached in February 2021.

Wells Fargo Investment Institute President Darrell Crok believes the fortunes of the stock market depend on technology fighting its way out of its current malaise.

“If you use the s&p as your proxy, mathematically you can’t go back to those highs if you don’t get a significant share of the tech,” crork said. “tech is still not just the largest sector, but is equivalent to the bottom five or six sectors mathematically in the index. if you don’t get tech involved, you’ll have a hard time getting back to previous highs or setting new all-time highs” .

As for the stock market forecast for the next six months, crork thinks the s&p is very likely to recover a bit and end the year around the 4,200 to 4,400 level, or 13.5% -19% more than the levels of June 17. . this would leave it well below the all-time high of 4,818 reached in January.

for her part, the director of ark invest, cathie wood, has said that she believes that the market is close to bottoming and that technology stocks will be the first to recover.

Impact of rising interest rates on stocks

Possibly the biggest factor causing so much destruction in the markets is the Federal Reserve’s policy shift in its goal of tackling inflation.

Jerome Powell, chairman of the Federal Reserve, underscored a new resolve to attack inflation when he unveiled a 75 basis point interest rate hike at this month’s fed meeting. she also indicated that there could be an equally large increase next month.

Wincrest Capital CEO Barbara-Ann Bernard believes investors should be cautious given the Federal Reserve’s move to finally rein in inflation.

“There’s a mantra in our industry not to fight the feds, and I don’t think you should here,” he said. “They have been very clear that the narrative here is no longer transitory, that they are going to bring the hikes forward and this is what the market is finally pricing in.”

powell has said efforts to control inflation could cause “some pain” as bankers try to achieve a “soft landing”. the goal is to achieve a cyclical slowdown in economic growth while only experiencing a brief recession, or none at all.

powell has admitted that the economy could see an increase in the unemployment rate “some tics”. But many economists worry that a more severe recession is looming.

recession risk and impact on the stock market

CEOs ranging from Jamie Dimon at jpmorgan chase (jpm) to elon musk of tesla (tsla) have issued stern warnings about the economy.

dimon used the most colorful language of all when he went from a cautiously optimistic outlook to predicting “a hurricane” in the space of a few weeks.

The cronk of the wells fargo investment institute told the investor business journal that the bank’s economists now expect a recession to start by the end of the year.

“We think the second half of the year is going to be pretty choppy. In fact, our base case is that probably in the fourth quarter of this year and going into the first and second quarters of next year, the US economy will experience a mild recession on the back of what’s happening with monetary policy, tightening financial conditions, deteriorating consumer and business confidence, rising cost structures and inflation.”

this is far from a peripheral view. most economists surveyed by the financial times expect a recession, and the main question is timing. in total, 38% predict it will happen in the first or second quarter of 2023, and an additional 30% believe it will start in the third or fourth quarter of next year.

why the stock market can recover in the midst of a recession

The stock market tends to be six to 12 months ahead in valuation terms, which means it acts as a forward-looking indicator.

hogan believes that the impact of inflation on the stock market has already been priced in significantly by investors.

“By the time we declare a recession, which usually happens in the middle and not at the beginning, the recession is already on its way,” he said. “If we declare a recession, is it going to surprise anyone who has been trading stocks over the course of the last 24 months? No, that’s the main concern of investors.”

In addition, stocks have already suffered a significant contraction that is not obvious when looking at the indices themselves.

“average stocks in the s&p 500 since its recent high are down 30%. average stocks in the nasdaq composite are down 48%. so i think again we have discounted some of the worst case scenarios that might not come to fruition,” he said.

cfra’s stovall said a normalization of inflation could encourage investors to increase exposure.

“The market could see a relief rally if investors start to believe that the Fed may need to scale back,” he said.

the role of the consumer in the impact of the recession on the stock market

one of the key drivers for the us. uu. economy is consumer spending, which accounts for roughly 70% of all economic growth.

but bernard, who is a portfolio manager at the contrarian wincrest fund, believes that the u.s. consumer is weaker than is widely recognized.

“We fell short on consumer discretionary. It’s a high-conviction idea,” he said. “2021 is not a ‘comparable’ year for retail in 2022. multiples have contracted, but eps expectations have not yet, and must, particularly in the face of so many headwinds, such as no more stimulus checks , the highest inflation in 40 years impacting margins, higher mortgage rates, and a preference to return to experiences like travel over another barbecue or on-demand TV streaming subscriptions.”

cronk from wells fargo agrees.

“We see signs of weakening in consumer. If you look at consumer confidence, we’re back down from where we were in parts of 2008-2009 in sentiment sentiment numbers, so consumer is worried,” he said. . “The question will be, if the consumer is 70% of the US economy and the big engine that drives growth, if (they) lose confidence and turn away from spending, that could be a challenge for growth figures”.

ukraine is a wild card for the stock market forecast for the next 6 months

energy and fertilizer stocks rebounded after russia invaded ukraine. by contrast, other stocks tumbled amid growing uncertainty.

“The war in Ukraine was one of those exogenous factors that pushed inflation to the next level and led to another de-risking moment on Wall Street,” said Oanda’s Moya.

For the moment, there is no clear end in sight to the conflict, which has dragged on for almost four months.

Fertilizer stocks and power sets increased significantly. but both have also been sold. With the West trying to cut off Russian imports of oil and gas, more profit is possible.

energetic stocks may have room to run

oil and natural gas stocks have been a strong outperformer in 2022. the vanguard energy (vde) index fund is up about 24% despite a recent sell-off.

some individual stocks have fared even better. examples include ibd 50 name matador resources (mtdr) and ranger oil (rocc), though both have weakened considerably of late.

Even oil major exxon mobil (xom) has delivered a performance that would put some growth stocks of years past to shame. rose as much as 75% before paring profits.

“some oil companies are going to be profitable at 40 or 60 dollars a barrel. we are almost at 120. they have good prospects”, said moya. “oil prices will remain elevated not only this year, but for the next due to a lack of investment in large wells and the transition to green energy struggles.”

but ryan thinks the energy stocks may need to back off to keep them from overheating.

“Some of them have been going up for almost 18 months, and just in the last couple of weeks, some had started going up almost straight,” he said. “the movement of oil and gas could be delayed.”

china shutdown and supply chain issues

China’s radical “zero covid” policy is disrupting already struggling supply chains. And while the country is showing signs of easing its sweeping lockdown measures, a bumpy road may lie ahead.

China is already rolling back some of the easing, with Beijing delaying the reopening of schools amid a new outbreak and Shanghai suspending dine-in services at restaurants.

Nicholas Burns, the US envoy to Beijing, has said the policy could last into the “early months of 2023”.

However, Chinese exports grew at a double-digit pace in May and exceeded forecasts. If the country continues to increase its exports, it would be a major catalyst for stocks as supply chains loosen.

stock market forecast for the next 6 months: bargain hunters beware

many investors will be tempted to use the current severe declines in stock prices as an excuse to go for “bargains” on bottom fishing.

Many of the fastest growing stocks, which had been valued based on revenue growth rather than earnings, suffered declines of 80% or more.

But bottom fishing carries clear dangers. Just because a stock has suffered a precipitous decline doesn’t mean it won’t continue its losing streak.

ibd’s o’neil warned that individual investors can be sucked in while hunting for bargains only to suffer painful losses.

“Many institutional investors love to ‘bottom fish.’ They will start buying stocks from a so-called bottom and help make the rally compelling enough to attract you,” O’Neil wrote in “How to Make Money in Stocks “. “you’re better off sitting on the sidelines in cash until a new bull market really starts.”

Follow Michael Larkin on Twitter at @ibd_mlarkin for more growth stock information and analysis.

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