Quantitative Easing

Anyone who dares to buy choppy stocks and get punished quickly

This year, trying to bottom out in stocks every time they fall is proving more costly than at any time since the 1970s.

In short, the bullish impulse is being wrung out. Investors were hit by a confluence of worrying developments on Tuesday, including spongy indications of industrial leader General Electric Co., worsening Covid trends in China, the dollar’s fourth consecutive daily gain and a report showing a weakening of consumer confidence. The Nasdaq 100 index was the hardest hit, falling more than 4% to the lowest in 11 months. The rout continued after hours as disappointing results from Alphabet Inc., Microsoft Corp. and Texas Instruments Inc. rattled investors.

Plagued by slow and steady declines spread over days and sometimes weeks, investors are shaken from their buying stupor. In 2022, the S&P 500’s average decline lasted about 2.5 days, longer than any year since 1974, while its returns after bear sessions were negative 0.2%. It is also the worst in nearly five decades.

“It’s trading like a bear market,” said Brian Donlin, equity derivatives strategist at Stifel Nicolaus & Co. “Rallies are being sold quite aggressively and bounces are getting smaller and smaller.”

That’s a stark change from the past decade, when all but one year saw the benchmark equity index rise on average after a day of decline. Many factors may have underpinned this shift, even if the Federal Reserve is lagging behind.

Churning losses are a relatively new experience for US investors conditioned by past bargain-hunting success. Four months into 2022, the S&P 500 has hit 17 separate year-to-date lows — the most over comparable periods since 1977.

After coming to the rescue of the market at nearly every sign of trouble since the financial crisis, the central bank is showing no such sympathy as it rushes to rein in inflation. Fed Chairman Jerome Powell raised interest rates in March, marking the first time since at least 1994 that a bull cycle began within a month of a stock selloff.

With the replacement of quantitative easing policy by the reduction of its balance sheet by the Fed, the central bank has ceded its role as a bull market ally and has become its biggest threat.

As bond yields rise, a big bull case for stocks – the idea that investors have no choice but to hold stocks, sometimes abbreviated TINA for “there is no alternative” – is in danger. “When do higher bond yields create a decent enough alternative?” Goldman Sachs Group Inc. partner Tony Pasquariello wrote in a note Friday. “The QE party is over, the QT era will soon begin and we have clearly moved to a regime of much higher volatility.”

Wild price swings are already a hallmark feature of the stock market in 2022. The S&P 500 has oscillated at least 1% for 86% of trading sessions, on track for the craziest year since 2009, according to data compiled by Strategas Securities. That, combined with lingering losses, finally seems to be weighing on sentiment. Investors, who went bargain-hunting during the first quarter, are fleeing stocks at the fastest pace since at least 2015. Nearly $26 billion has been withdrawn from equity-focused exchange-traded funds this month, according to the data.

While some of the exits from ETFs, including Vanguard S&P 500 ETF (ticker VOO) and iShares Core S&P 500 ETF (IVV) may be tax-driven, sentiment may be the reason for the exits from Financial Select Sector SPDR Fund (XLF ) and iShares Russell 2000 ETF (IWM), according to Eric Balchunas of Bloomberg Intelligence. Not everyone abandons the proven strategy of buying by immersion. JPMorgan Chase & Co.’s Marko Kolanovic, one of the most staunch bulls among Wall Street strategists, urged clients to add stock holdings on Monday, saying the market should rally in the coming days, negating the losses of the previous week.

As rewarding as it has seemed since the low point of the pandemic in 2020, when stocks embarked on a staggering 99% two-year rally, bottom fishing is getting risky. After a brief respite earlier this month, stocks resumed their carnage, with the S&P 500 approaching its year low and the Nasdaq 100 returning to its May 2021 level. reap long-term gains, the market’s inability to stem the bleeding can be nerve-wracking. Investors have been battered by extended declines all year, with the S&P 500 posting four separate periods when it fell on at least four days in a row – a rate that, if sustained, would make this year the worst for bottom feeders since 1984.

“Without a doubt, the feeling of the market has changed. This is a stock market where it is more profitable to sell hard,” said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc. “We expect this bear market to remain in place until the second quarter and, only if inflation risks have shown significant signs of having peaked, can this turn into a slight risk rally in the second half.”

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  • Anyone who dares to buy choppy stocks and get punished quickly
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