How far will the stock market decline go?


How far will this slide go further?

In the latest LPL Market Signals podcast, Chief Equity Strategist Jeffrey Buchbinder and Chief Global Strategist Quincy Krosby share their thoughts on the scope of this latest pullback. They also provide an update on the housing market, discuss growing recession risks in Europe and preview the Federal Reserve’s Jackson Hole symposium later this week.

How far further can this slide go?

Strategists believe the Fed symposium in Jackson Hole this weekend will go a long way in determining the short-term direction of the stock market. With only a 4% pullback so far and the battle against inflation far from over, further decline is possible. LPL Research is eyeing the 3900-3950 range as potential support from the S&P 500 is likely to materialize yet again. The 17% rally in the S&P 500 accompanied by an increase in magnitude in October 2011 was followed by a 10% correction in November 2011, suggesting that additional volatility could arise even as strategists expect stocks are solidly higher a year from now.

Housing downturn set to continue

Strategists noted that the housing market continues to feel the effects of rising interest rates and inflationary pressures. Existing home sales fell 5.9% in July, the biggest one-month drop since February 2022 and the sixth consecutive monthly decline. Outside of the pandemic, sales were at their lowest levels since 2015. Based on the drop in buyer traffic and the lagged effect of Fed tightening, the housing downturn is likely to continue and will likely weigh on gross domestic product in the second half. The good news for home values ​​is that supply is still tight, keeping the average number of days homes were on the market at 14 days in July.

Worsening energy crisis in Europe

Strategists discussed the growing risk of recession in Europe as energy prices continue to soar. Electricity prices in Germany have gone parabolic. The strong dollar, while helpful for US tourists traveling to Europe, and COVID-19 related disruptions in China are putting additional pressure on Europe’s economic growth. At the same time, the UK inflation outlook is becoming increasingly dire. Meanwhile, US pump prices, based on the AAA national average, have fallen for 70 consecutive days, confirming LPL Research’s continued preference for US equities over their European counterparts.

What to expect in Jackson Hole

The Fed will likely reiterate its resolve to reduce inflation this weekend, while emphasizing its reliance on data. Strategists still believe the Fed will eventually win the battle against inflation, but it’s unclear how far rates will have to go to achieve that.

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This research material was prepared by LPL Financial, LLC.


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