The S&P 500’s first-half 2022 performance is at levels not seen since 1970. The 30-year mortgage rates approached 6%. The Federal Reserve may continue on a 75 bps rate hike cycle. Much of the negative news is priced in the market. How much downside does the market have from here?
Mortgage rates recently began falling. This suggests lending rate levels will not rise further from here. This will help consumers, who face higher monthly mortgage payments. The improved disposable income levels will result in a rebound in consumer demand. This would limit the downside for stock markets.
Bond yields, especially the 30-year treasury (TLT) and the 10-year (IEF) are backing down. Markets are at or approaching peak pessimism for the bond market. The falling yields will help stocks recover.
More Downside Risks
The S&P 500 still trades at a fair price-to-earnings multiple in the teens. Chances are high that the Fed will not achieve a soft landing. The central bank must weaken demand to slow inflation. Once it gets ahead of higher price momentum, stock markets will anticipate peak interest rates. The higher certainties will reverse the negative market sentiment.
Stock markets are likely approaching a bottom. Investors who like current stock valuations may consider averaging down from here.