To say it has been a bad year for the market is an understatement and the markets have reason be cautious.
Coming off the worst month since March 2020 and the third consecutive quarterly decline, the U.S. stock market started October on a high note. The S&P 500 rallied 2.6 percent on Monday and 3.1 percent on Tuesday to make up some of the losses incurred in September, which the index ended down 9.3 percent. Both the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index posted similar gains to start the month, feeding cautious hopes of a year-end rally.
Ironically, this week’s rally has likely been fueled by a combination of “bad” news, as the problems at Credit Suisse, slower-than-expected manufacturing growth and a decline in construction spending led to hopes that the Fed might be less aggressive in coming rate hikes than originally anticipated. According to the CME FedWatch Tool, the probability of another 75 basis point hike on November 2 fell from 73 percent to 53 percent on September 29. And although it has climbed back to 69 percent since, investors are no longer certain that the Fed will stay as aggressive in its attempt to tame inflation.
As the following chart shows, investors could really use an extended rally to end the year, as the stock market is currently headed for its worst year since 2008. Even in 2020, when the Covid-19 pandemic sent markets into turmoil, the recovery was swift and stocks rallied for much of the second part of the year. According to macrotrends.net, the S&P 500 has only ended the year down more than 20 percent twice in the 21st century: in 2002 and in 2008.
U.S. Stocks on Track for Worst Year Since 2008 by Felix Richter, Oct 5, 2022