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Market Insider: May 24, 2022

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U.S. Money Reserve

May 24, 2022

On May 18, 2022, the Dow Jones Industrial Average fell over 1,100 points. This was the index’s largest drop since 2020 according to CNBC. The S&P 500 and Nasdaq also fell on May 18, and all three continued on a downward trajectory the following day.

While some stock prices have significantly fallen recently, experts warn that they could fall even further, increasing the possibility of a potential recession.

Stocks have had a turbulent start to 2022.

Man examining stock info as data shows up and down movement

On May 18, 2022, the Dow dropped 1,164.52 points, or almost 4%. The S&P 500 fell 165.17 points, slightly over 4%—its biggest single-day drop since 2020 according to The Wall Street Journal. The Nasdaq fell almost 5%, or 566.37 points.

This turbulent trading session is the latest in a volatile year for the stock market. As of May 19, 2022, the S&P 500 has fallen over 19% since its record high in January. This brings the S&P 500 close to bear market territory, which is defined as a 20% fall from a recent high. The Nasdaq has already entered bear market territory, having fallen 27% thus far in 2022.

Despite significant drops, some stocks are still said to be overpriced by certain measures and thus may continue to fall.

The price-to-earnings ratio is a common metric used by Wall Street professionals to determine whether a stock is fairly priced. When applied to the broader market, this metric has recently shown that stocks in general are overpriced and therefore may be subject to a market correction. On May 14, 2022, The Wall Street Journal reported that “even though it has fallen 16% to start 2022, the S&P 500 traded late this week at 16.8 times its projected earnings over the next 12 months.” Elevated stock prices may indicate a market bubble.

Strategists at Citigroup Inc. say the U.S. stock market entered bubble territory in October 2020. In a note published in May 2022, the strategists wrote, “When a major equity market bubble is deflating, it may undermine most global equity markets, not just the one that is deflating. This would suggest that a potentially deflating U.S. bubble should be a negative for equity risk more broadly.”

Market historian and GMO co-founder Jeremy Grantham says that the stock market is exiting from a bubble worse than the dot-com bubble of 2000. In an appearance on CNBC on May 18, 2022, Grantham stated, “The other day, we were down about 19.9% on the S&P 500 and about 27% on the Nasdaq. I would say at a minimum, we are likely to do twice that. If we are unlucky, which is quite possible, we would do three legs like that, and it might take a couple of years [finish falling?] as it did in the 2000s.”

Experts say further market turmoil may be likely.

Hand holding phone displaying stock data

Goldman Sachs senior chairman Lloyd Blankfein told CBS’s “Face the Nation” on May 15, 2022, that the risk of the U.S. falling into a recession is “very, very high. If I were running a big company, I’d be very prepared for it. If I [were] a consumer, I’d be prepared for it,” Blankfein said.

Blankfein is not the only banker to hold this view. Wells Fargo CEO Charlie Scharf said on May 17, 2022, that there is “no question” the U.S. economy is headed for a downturn.

Guggenheim Partners Global CIO Scott Minerd told MarketWatch in an interview on May 18, 2022, that he believes the Nasdaq could ultimately fall 75% from its November 2021 peak, and the S&P could drop 45% from its January 2022 peak. Minerd commented that recent market action “looks a lot like the collapse of the internet bubble.”

On a Fox Business appearance on May 19, 2022, Craft Ventures co-founder and general partner David Sacks said that the U.S. economy could be headed for a “very serious” recession. Noting rising interest rates as a possible catalyst for market turmoil, Sacks said, “Over the last six months, there has really been a collapse in valuation levels as people realize that we’re not going to be in this low interest rate environment forever.”

If these experts are correct, the stock market may continue on a downward trajectory.

Read U.S. Money Reserve’s “Market Insider” each week for more economic insights. Nothing herein should be considered as portfolio or retirement advice as U.S. Money Reserve (“USMR”) cannot and does not offer financial advice. Clients should consult a financial advisor for specific advice. This commentary is provided by USMR for informational purposes only and is provided on an “as is” basis without any warranty of any kind, whether express or implied. Your use of the information provided in this commentary is entirely at your own risk. In no event will USMR be held liable for any indirect, special, incidental, or consequential damages arising out of the use of information contained in this commentary.


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