Everybody’s searching for the bottom of this wild market selloff.
Some of us want to go down in the history books as the legendary investor who publicly called the bottom. Others want to still make money in some shape or form. Most of us just want the pain to stop already.
I don’t have a crystal ball, so I’m not here to tell you when your stock and crypto investments will turn around.
Instead, this week, I’ll tell you what a bottom could look like with a little help from history.
We may be closer than you think, but what will it take to get us there?
A pressure release
There’s a lot of pressure on markets right now. Investors have dealt with a bunch of sour narratives since the beginning of the year, but the most influential has arguably been the Fed’s vice-like grip on risk assets. Fed officials have essentially talked the markets into expecting 10 to 11 rate hikes this year, leading to the slide in tech stocks and a 10-year yield at 3%.
Sometimes, what ends a selloff is what started it in the first place. Decades-high inflation and rate hike talk fueled fears, so easing inflation and yield pressure could be what signals a bottom. Some thought we’d get that when Consumer Price Index data showed inflation growth slowed in April. Instead, the markets focused on how high inflation still is. Yields flared up and stocks fell further.
Markets ― especially tech stocks and crypto ― may desperately need a pressure release. After all, investors tend to trade growth-focused assets based on future potential. When rates rise, the value of a dollar in the future falls (versus the value of a dollar today). Right now, tech stocks still look expensive relative to how high bond yields are.
One side may have to give. And that could end up being yields.
A glimmer of hope
Fear has been unusually high for a few months. At the end of April, 84% of investors were pessimistic or uncertain about the stock market’s prospects, the highest level since 2016, according to American Association of Individual Investors (AAII) survey data.
It makes sense ― there’s plenty to be worried about. But it’s becoming apparent that we might be too worried.
Excessive fear can signal a turning point for markets, too. When investors are afraid, they tend to have more cash on the sidelines or they’ve properly hedged their positions. In turn, they’re in a better spot to brace for pain, as well as jump in when the coast is clear. When fear and uncertainty ― measured by AAII ― has risen to 84% or more, the S&P 500 has always climbed higher in the following 12 months.
But if we do witness a feelings-driven rally, watch out for beaten-down pockets of the market like tech and retail to gauge just how durable the bottom could be.
Keep an eye out for the head fakes, too. The biggest up-and-down moves tend to happen when the mood is fragile.
A bear fight
Up until now, this S&P 500 selloff has stayed in correction territory, or between 10 and 20% from the highs. If the index closes below 3,837.25, it’ll be in a bear market: a 20% selloff, or what’s considered the threshold between a fairly normal drop and something more ominous.
Luckily, the S&P 500 rarely reaches bear market territory. The S&P 500 has dropped 10% or more 32 times since 1950, but it’s only fallen 20% or more 10 times. Seven of those 10 bear markets shared a common denominator ― they’ve overlapped with economic recessions.
The markets have seen their fair share of crazy selloffs, even in a historically long bull market over the past decade. However, many of them were just quick swoons after a long rally sparked by a few odd headlines, instead of an economic crisis with far-reaching repercussions.
We may be seeing the same situation play out today. Economic data looks fine – the panic is more around what could happen instead of what is happening. Now that we’re close to a bear market, investors may be asking themselves if we’re actually in crisis mode.
What happens next?
Ultimately, nobody knows. But history has made one thing clear ― stocks have recovered from every single crisis. Crypto has gone through its share of big drops, but the space has graduated to broad retail and institutional ownership. That could keep crypto prices resilient, but it may depend on the coin you’re investing in.
Plus, panicking near the lows of a selloff may lead to missed opportunities down the road. When the market rebounds after a swift selloff, it tends to turn quickly. Consider this: If you invested in a hypothetical no-fee S&P 500 fund 20 years ago and sold at the bottom of each big drop ― then bought back in 10 days later ― you would’ve missed out on more than half of the gains over that period.
Don’t get tempted to time the market, even if you feel bogged down by your emotions. If you’re a long-term investor, it may be worth waiting out the storm.
*Data sourced through Bloomberg. Can be made available upon request.