The S&P 500 index, Nasdaq and Dow Jones Industrial Average (DJIA) have both recorded their highest close in nearly seven weeks off the back of many corporate earnings beating expectations and the latest 0.75% interest rate hike from the federal reserve.
The S&P500 is up 12% to 4,072 from the lows of 3636, the Nasdaq is up 15% to 12,162 from the lows of 10,565 and the DJIA is up 9.7% to 32,529 from the lows of 29,653.
With this, here we have 5 reasons why we think the US indices have bottomed, well for now at least.
Reason #1: Positive share price reactions to earnings from the TAMAMA stocks
The Big tech companies or the TAMAMA companies, which comprises Tesla, Alphabet, Meta Platforms, Amazon, Microsoft and Apple make up approximately 20% of the S&P 500 and over 40%. Of the 6 stocks, only Meta’s stock prices fell after its earnings was announced.
When comparing revenue, all recorded slowing growth or declines. None saw an acceleration in revenue growth. Operating profits were mostly down compared to previous quarters. Some even recorded declines when compared to the same quarter of the previous year.
The positive share reactions are due to earnings performing better than expected despite the decrease and/or positive guidance which signals potential recovery or growth for these stocks.
Reason #2 The market thinks the Federal Reserve is dovish
On 27 July 2022, the Federal Reserve hiked interest rates by 0.75% to a range of 2.25% to 2.50%. This was the second Fed meeting in a row that ended in a 75 bps rate hike. Raising interest rates is generally viewed as a hawkish or aggressive move, but the Fed Chair, Jerome Powell’s comments has left market watchers expecting for dovish or mild moves in the future as Powell has signalled that interest rates are currently neutral and that the Fed is aware of the negative impact of its rate hikes on the economy.
This provided some relief to the stock markets as the Fed is acknowledging that there can be an impact on growth, to the economy, based on their policy.
Powell has said that the Fed could slow rate hikes in the months ahead and would be data dependent. In response, the 10 year bond yield which peaked at nearly 3.5% on 14 June did not spike after the meeting but instead fell to a 4 month low of 2.67%.
With the yield curve currently inverted, the market is expecting the Fed to take a more dovish approach in the months ahead.
Reason #3: Looks like a mild recession is on the cards
The US GDP has recorded two consecutive quarters of decline, with a -1.6% decline in 1Q22 followed by a -0.9% decline in 2Q22. Two consecutive quarters of decline is a widely accepted rule of thumb for a recession; however there is no formal definition in place.
The US National Bureau of Economic Research has not declared a recession and market watchers speculate that one of the main reasons is because the labour market still looks healthy. The unemployment rate sits at 3.6%, down from 5.9% the year before. The US GDP is still expected to record an overall growth for 2022 which points to a mild recession.
Reason #4 Technical indicators look good for now
Looking at the chart below, we note that the S&P 500 index is above the 20day moving average and has also broken up from the shorter term down trend channel. The RSI & MACD indicators have also turned up. It is worthwhile to note that while it is still in the longer term downtrend channel, it has broken above the half way mark which is a positive sign.
Of course, this could all change very quickly should the S&P 500 index falls back into the shorter term down trend channel.
Reason #5 The US mid term election is coming
The US mid term election is on 8 November 2022. This is held around the mid point of a President’s 4 year office term. The President himself is not standing for election but all house of representatives and a third of the senate will be put up for election. In addition, many state governors, mayors and other public offices will run for election. The President himself is not standing for election
Although the stock market is usually volatile in the preceding months, with Biden having a low approval rating now, some market watchers believe that policies will be put in place to support the economy and gain broader support.
As the stock market is an important measure of wealth, should the S&P 500 index fall below 3800, which is the level at which Biden was sworn in as President on 20 Jan 2021, or below 3300, which is the level the index was at when Biden was elected on 2 November 2020, this may be viewed negatively by voters.
But wait, there’s more. Alvin share his thoughts on why the US markets may have bottomed:
Closing statement
We have listed 5 reasons why we think the US indices may have bottomed for now. Many of these reasons such as a dovish Federal Reserve, a potential mild recession and the impending US election are merely perceptions or opinions.
In addition, positive share price reactions post earnings from most of the big tech or TAMAMA stocks have led to the charts and technical indicators looking good for now.
We have previously listed four reasons why we think the bottom is in for the HSTech from both fundamental and technical analysis perspectives. Of worthy note was reason #3 stating that technical analysis indicates that the HStech index is on a bull run.
We made the following statement “Should the HSTech index meaningfully break down from the lower end of the uptrend channel of around 4400 points, this may reflect the end of the bull run until such time another uptrend is formed.” In just two weeks, the HStech has fallen and broken down from the uptrend channel.
Similarly, we highlight here that the end of the bull run may be reflected should the S&P 500 index fall back into the short term down trend channel.
If you’re a long term investor, you should continue to take note of the current dynamics at play before making any investing decision.
