a recession will determine the bottom of stocks

  • The stock market staged a historic turnaround on Thursday after Russia launched its attack on Ukraine.
  • The Nasdaq 100 rose more than 3% on Thursday after initially falling more than 3%.
  • Such a reversal has not occurred since 2008, and whether a bottom has been reached will be determined by this factor alone.

Thursday’s historic reversal in the Nasdaq 100 shocked investors, with the tech-heavy index closing the day up more than 3% after falling 3% in early morning trading.

That 6% one-day trading range on the Nasdaq hasn’t happened since December 2008, according to a Friday note from Chris Murphy of Susquehanna International Group.

“In the past 30 years there have only been 10 other reversal days like yesterday, all of which occurred during the Great Financial Crisis and the dot-com crash,” Murphy said.

This is not a good sign for bullish investors, as these market environments were indicative of a classic


bear market

rally, with raised


volatility

and down


liquidity

.

But according to Murphy, one factor will largely determine whether today’s stock market will follow the same path as the dotcom bubble and the Great Financial Crisis, or whether the market has bottomed out and will rebound: an economic crisis.


recession

.

“Historical precedence says we are [near the lows for this correction] if we avoid a recession,” he said.

And that’s definitely a possibility. The economy has continued to expand in a post-pandemic environment, with strong consumer balance sheets, corporate profits at or near record highs, and millions more job openings than there are unemployed.

But there are several headwinds in the US economy that could exacerbate recent market volatility and lead to a continued decline in stocks, and ultimately a recession.

“If war, inflation and the Fed push the US economy into a recession, then historical precedence points to more downside,” Murphy explained.

That view matches a Friday note from Bank of America, which warned a bear market is looming in 2022 as the Fed raises interest rates and shrinks its balance sheet in an economy that sees decelerating growth. and persistent inflation.

But if the U.S. economy manages to keep growing amid heightened uncertainty surrounding Russia’s invasion of Ukraine and the possibility of rising commodity prices leading to Fed rate hikes, then a tradable low was likely reached in the stock market on Thursday, according to Susquehanna.

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