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Published: Jun 08, 2022 10 min read

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Rangely Garcia / Money

Stock market investors have experienced one of the worst starts to a year ever. But now that the markets have shown some glimpses of a possible recovery, investors everywhere are wondering: Have stocks hit bottom, or are we headed towards another cliff?

Investors have been on a rollercoaster over the last few years. During the pandemic, stocks tanked briefly and then kept hitting record highs, buoyed by stimulus money from the government, near-zero interest rates and a boom in investing. Now, the time of making easy money in the market appears to be over.

The Federal Reserve has already hiked its benchmark interest rate twice to try to rein in high inflation, and has indicated it plans to continue to do so. The Fed has also started to reduce its balance sheet. This is partly why 2022 has been a bad one for the stock market, with the S&P even briefly entering bear market territory in May, which is defined as a 20% drop in price from previous highs.

In late May, Ryan Detrick, chief market strategist at LPL Financial, wrote that the first 100 days of trading in 2022 was the worst worst start to a year since 1970 for the S&P 500 Index — a common benchmark for the stock market as a whole — and the fourth worst ever.

"Expectations have gotten extremely low," Detrick says. "Investors are feeling pretty bad."

But, he adds, markets are forward looking — so good economic news could make a huge difference in when and how fast stocks take off again. And after bear markets, stocks typically tend to recover really quickly.

The stock market has picked up since dipping into bear market territory in May, though the S&P 500 is still down around 13% for the year. So are stocks on that path to recovery already, or is more pain on the horizon? Here's what experts say.

Inflation, stocks and a possible recession

The annual inflation rate accelerated above 8% in March and April and currently sits near a 40-year high. Everything from groceries to gas is getting more expensive, and it's caused headaches for the Fed — not to mention consumers. When assessing what's next for stock prices, experts are keeping a really close eye on inflation, and how the central bank is responding to it.

"If we start to see some improving inflation data, that could be the spark that is needed to continue a summer rally,” Detrick says.

In fact, Detrick says he thinks we've already reached peak inflation, and that May 19 very likely could have been a significant low for stocks.

Not everyone agrees. Sam Stovall, chief investment strategist at CFRA Research, says he thinks stocks have further downside ahead.

"The prospects of a recession have been rising," he says. "That's causing investors to be concerned."

Many other finance experts have also expressed deep concerns about where the economy is heading. Lloyd Blankfein, the former CEO of Goldman Sachs, told CBS News there's a "very, very high risk" of a recession, while Wells Fargo CEO Charlie Scharf recently said there's "no question," the U.S. is headed for an economic downturn. Larry Harris, former chief economist of the U.S. Securities and Exchange Commission, also told CNBC a recession is likely, and JPMorgan Chase CEO Jamie Dimon predicted an economic "hurricane."

According to Stovall, the "unnerving historical implication" is that every time the year-over-year change in headline consumer price index (CPI, the measurement use for inflation) exceeded one standard deviation above the mean, like it does today, the U.S. fell into recession and the S&P 500 dropped into a bear market. Plus, bear markets accompanied by recessions were deeper and lasted significantly longer than those when the economy didn't enter a recession.

More volatility for stocks

Experts are split on whether or not we've reached peak inflation, whether or not we're heading towards a recession and whether or not stocks have further down to go. But there's a general consensus on one thing: more volatility is likely.

We're in an environment that is challenging for any kind of risk asset, says Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management. With inflation still so high, the Fed is trying to cool economic activity. As long as the current economic picture remains the same, the Fed will maintain this strategy, which will continue to create challenges for the stock market, Draho says.

That probably means more uncertainty for investors and more volatility for stocks. There's a chance we could see stocks plummet again. But if that happens, it also wouldn't surprise Draho if stocks then rallied back to current levels or higher soon thereafter.

"What we've seen in the last couple of months is likely to persist at least through the next couple of months," he adds. That doesn't necessarily mean another drop of 15% or more, but it does indicate more choppy market volatility.

Unfortunately, as much as you may want to find a magic sign that the market's hit bottom and it's time to buy, there's never going to be a clear and accurate consensus on what's next for stock prices.

“There never is an all-clear signal sounded over the market," says John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. "There is never a ‘Come on in, the water’s fine' kind of moment in investing."

What investors should do

Draho says it's difficult for investment professionals who are looking at market daily to sift through all this uncertainty and make sense of it. And it's going to be even more complicated for the everyday investor to figure out what's happening in the market and what's the best course of action.

Above all, you want to make sure you have a long-term plan that outlines what you're trying to accomplish, and that ensures your portfolio is set up to achieve those goals, Draho says. A diversified portfolio with a mix of stocks, bonds and cash that aligns with your goals, financial situation and risk tolerance is key. Periods of market volatility offer a good chance to revisit your portfolio and make sure it's still sticking to the plan.

You may find that it's time to trim some of your allocation to one sector, if your portfolio is now a bit too heavy in that area. Or, if you see that you're sitting on more cash you won't need for the next two to three years, it could be time to start putting those funds to work in the markets.

Is this a buying opportunity for stocks?

All of the experts interviewed for this story acknowledged that, while the stock market might be especially puzzling for investors right now, there are buying opportunities out there.

The market can often act like a pendulum, periodically swinging too far into over- or undervalued territory, says David Sekera, chief U.S. market strategist for investment research firm Morningstar. Right now, he says the market is trading at a discount — and it could be smart to make adjustments accordingly within your long-term plan.

"That plan should allow for the ability to rebalance and take advantage of times the market has moved too far in one direction," Sekera says.

Growth stocks (like tech stocks) are currently the most undervalued sector of the stock market, according to a recent Morningstar analysis. Mega-cap tech stocks like Amazon and Facebook's parent company Meta, which helped lead the stock market out of its March 2020 market low, have gotten especially pummeled during the recent market selloff. But there are other sectors looking favorable as well, like the consumer discretionary sector, which consists of non-essentials like entertainment and appliances, as well as the financial and industrials sectors, Stoltzfus says.

If you decide to make changes to your investment portfolio, it's best to avoid stressing out too much about the day-to-day market fluctuations — and definitely don't let that stress dictate your strategy.

"Don't let emotions rule your portfolio," Stovall says. "This too shall pass."

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