The Wall Street Journal (WSJ) analyzed on the 20th (local time) that despite the recent plunge in the New York stock market, the decline is still in the early stages. Looking at past data, it is noteworthy that stock prices could continue to fall until the U.S. Federal Reserve (Fed) policy changes occur.
According to a study by Vicky Chang, global market strategist at Goldman Sachs Group, the S&P 500 has plunged at least 15% on 17 occasions since 1950.
In addition, in 11 of these cases, the stock market bottomed out when the Fed shifted its monetary policy back to easing.
As the Fed is already signaling an additional rate hike within this year, it has not yet bottomed out. The Fed has hinted that it is willing to raise interest rates further this year after taking the “Giant Step” last week to raise the benchmark interest rate by 0.75 percentage points for the first time since 1994.
The S&P 500 index fell 5.8% last week, the largest drop since the COVID-19 pandemic. It has plunged 23 percent this year.
Many investors and analysts worry that rising prices and the Fed’s aggressive rate hike could put the economy into a recession.
U.S. retail sales fell 0.3 percent last month from the previous month to negative, and the consumer sentiment index released by the University of Michigan also hit the lowest level.
Although corporate earnings are currently strong, analysts expect to be pressured in the second half. According to FactSet, a total of 417 S&500 companies mentioned inflation in their first-quarter earnings announcement, the highest figure since 2010.
As a result, there is a possibility that the Fed will cut interest rates again sometime next year. David Kelly, senior global strategist at JP Morgan Asset Management, said, “The Fed’s move raises the risk of an economic slowdown this year or next year,” adding, “It would not be surprising if the Fed held a meeting to consider a rate cut within a year.”
The WSJ said, “The market has historically responded positively and quickly when the Fed begins to shift its monetary policy to easing,” but pointed out that it is uncertain when the Fed will change its policy and how much more pressure the economy will be under.”
