S & P500
it has done so badly this year that it is now trading at a frighteningly low level. This usually presents an attractive opportunity for long-term investors.
The market benchmark, down more than 11% for the year, has just hit a “death cross”. This is when the index’s 50-day moving average drops below the 200-day number.
It’s a sign that something is on the way to the market, should anyone need more evidence. In normal times, when stocks are rising, the average of recent prices is above the 200-day figure because the long-term figure includes the levels where stocks were lower.
Stock prices have fallen below their long-term trend as investors view the current risks to the economy as formidable. The Russia-Ukraine war led to sanctions on Russian commodity exports that reduced the amount of such commodities on the global market, causing prices to skyrocket.
As a result, consumers could withdraw from spending. Even before the Russian attack, inflation was taking off, putting pressure on central banks to slow the economy to keep prices in check. Central banks are already expected to raise interest rates several times this year.
The S&P 500 death cross brings the index’s 50-day moving average to around 4,465. This is below its 200-day moving average of 4,467. All it would take for the index to close with a death cross is for it to end below 4.377 on Monday; it was 4,199.90 in the early afternoon.
While that makes things bleak in the stock market, it’s probably a good time for long-term investors to buy stock. Historically, the S&P 500 tends to record impressive gains over the 12-month period following an initial close in a death cross. Based on the 53 times the index has closed in cross-death territory, the average gain over that range is 50.7%, according to market data from Dow Jones.
To be sure, the index finger can remain in a mortal cross for some time; the average period is 155 trading days. But once the gains materialize, they tend to be exciting. The last time the index closed in death cross territory was on March 30, 2020, when the sky appeared to be falling as the pandemic began. Since that time, the index has gained over 55% for the following year.
The point is that at some point, the macroeconomic risk that pushes stocks down is fully reflected in their prices. And as long as corporate earnings continue to rise, stocks will pick up again at some point.
Write to Jacob Sonenshine at firstname.lastname@example.org