Wind of panic on Wall Street: simple correction or prolonged depression?

A small wind of panic blew on Wall Street this week after the Nasdaq fell sharply, with investors wondering if the market will stick to a correction or if we embark on a prolonged depression, risky for the economy. and the Biden administration.

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Since its last record in mid-November, the Nasdaq index, with its strong technological dominance, has dropped more than 15%, which anchors it clearly in the correction zone, with its worst month since October 2008, in the midst of a financial crisis.

The broader S&P 500 index, which is more representative of the American market as a whole, has lost 8.3% since its last peak at the start of the year.

The spectacular fall in Netflix shares (-21.79% on Friday) – yet one of the darlings of Wall Street having reached almost 700 dollars in November, to fall around 400 dollars – sent chills down the spine and began to worry small holders and their retirement savings plan (401k) invested in the stock market.

“Your 401[k] is probably 40% lower than it was three months ago. I’m 65 and I don’t have time to get over it. Thank you, Joe Biden”, complained a user.

“People are losing a lot on their 401[k]. The wallet decides the election, so expect the Democrats to be completely defeated,” added another.

President Joe Biden, already in a dip in popularity because of the economy, faces a tough midterm legislative election this fall.

It is the prospect of a rise in interest rates by the American Central Bank (Fed), to curb inflation at its highest in a generation, which is shaking Wall Street.

Rates, held at or near zero since the start of the pandemic, are expected to rise by about a percentage point this year. Many also think that the Fed has missed the turn in inflation and that it could operate a more severe tightening.

From bull to bear

But the question is how much a correction can turn into a bear market or “bear market”, i.e. in an extended decline, as opposed to a “bull market” or bull market, a rising market.

“It is true that the market acts without rhyme or reason, except for the Nasdaq”, recognized Peter Cardillo, analyst for Spartan Capital, evoking the wind of panic. But he thinks the season of mostly positive corporate results will change the dynamic.

For Gregori Volokhine, portfolio manager at Meeschaert Financial Services, “we are still far from bear market, but if we start to anticipate a slowdown in the economy with the rise in rates, then we will continue to sell which could take us from a simple correction to a bear market».

The U.S. economy is still expected to grow vigorously in 2022 as it recovers from the impact of the pandemic, but forecasters have already trimmed their projections.

Could a stagnant stock market still affect growth? “It could slow down the recovery, but not throw us into recession,” Sam Stovall of CFRA told AFP.

“We just cut our forecast for GDP growth from 4.6% in 2022 to 4.2%, but that has more to do with the duration of inflation and with expectations that the Fed will raise rates every quarter this year”, adds the expert.

For others, the correction, if not too prolonged, is a healthy step in a sometimes overvalued market.

A key indicator of stock valuation, the P/E ratio, which compares a stock’s price to the company’s earnings per share, currently sits at 21.2 for S&P 500 companies. that one pays more than 21 times the amount of the earnings per share of the company to be a shareholder.

According to calculations by Sam Stovall, historical statistics show that this ratio could drop to 19.7 at best in a 10-year rate environment between 1.75% and 2.25%. “This corresponds to a 15% drop in the S&P 500, so we are in the middle of a correction,” says the expert.

“And history tells us that we could go down double, to -30%”, if the famous ratio drops to 16.2, its historical average in a similar rate environment.

But the story brings another comfort: “Wall Street is an opportunist,” says Sam Stovall. “After a correction, investors come back in force and on average, it takes no more than four months to return to equilibrium,” he adds.

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