The market has come under severe selling pressure, and nothing has told us that more than the price action since last Thursday, when stocks began to plummet on a combination of hawkish “Fed speak” and global growth concerns, explains Jim Woods, editor of Bullseye Stock Trader.

Now, in early Wednesday trading, markets have rebounded a bit, but that isn’t much consolation for the bulls, as stocks in the Nasdaq Composite (COMPX) now are officially in bear market territory (i.e., more than 20% below their most recent highs).

So, what is it going to take for stocks to begin a marked improvement from here?

To answer that question, the market needs to answer four key questions: Why have stocks dropped to the March lows? What’s holding up best? What makes this stop? How bad can it get?

Yesterday, the Nasdaq closed at fresh year-to-date (YTD) lows and the S&P 500 (SPX) closed essentially on YTD lows, as the selling over the last several trading days has been intense. Given this steep decline and the fact that the S&P 500 is teetering on important support, I wanted to step back and clearly explain those four key questions: Why have stocks dropped so sharply in less than a week? What’s holding up best through this route? What makes this stop? How bad could it get?

Why have stocks dropped to YTD lows? The S&P 500 has declined 7% in just five trading days. If there is a singular reason “why,” it is rising worries about a global recession. Notably, it’s not coming from the United States or the Fed. The outlook for Fed policy hasn’t changed nearly as much as the drop in stocks would imply.

Instead, it’s coming from overseas. China is doubling down on its hopeless “Zero Covid-19” policy, whereby it shuts down huge cities and essentially causes economic “brownouts” to stop the spread of Covid-19. And since that’s a futile strategy that won’t work, markets are concerned this will go on in perpetuity. Meanwhile, these temporary economic shutdowns are more than offsetting the stimulus from Reserve Ratio cuts (and all other stimuli). Bottom line, if the Chinese economy plunges into recession, it’s bad for every major economy, including the United States.

Meanwhile, as we stated when Russia first invaded Ukraine, the longer this dragged on, the worse it would be for economic growth—especially in Europe because it would turbocharge commodity prices and other inflation. Well, we are two months into the war, and there are no signs it’s ending anytime soon, and more signs it could spread beyond Ukraine into Moldova. The growth headwinds from this war are raising the chances of a recession in Europe and the United Kingdom. If that happens, it’ll be bad for every major economy (including the United States).

Bottom line, what’s changed since Thursday, April 21, is that worries about a global recession have surged given concerns about China’s growth and fears that the Russia/Ukraine war isn’t ending anytime soon and may spread. That’s the main reason the S&P 500 is down so sharply.

What’s been working? Since last Wednesday (when the breakdown occurred), all 11 sector SPDRs are lower, but the defensive sectors have relatively outperformed. Consumer Staples (XLP) and Utilities (XLU) are down 2% and 4%, respectively, while Real Estate (XLRE) and Healthcare (XLV) are down 5% each. More broadly, the Invesco S&P 500 Low-Volatility ETF (SPLV) and Vanguard Value ETF (VTV) also are relatively outperforming, down 4.5% each, and this mirrors what’s outperformed the entire YTD. Since growth worries are at the core of this pullback (and at the core of YTD volatility) we continue to expect these ETFs to relatively outperform and view them as a safe place to “hide” amidst increased volatility.

What makes it stop? The core concern is a looming global slowdown, so we have to get news that reduces that concern. Specifically, that means China reversing its “Zero Covid-19” policy or Covid-19 subsiding so there are no more lockdown threats, Russia and Ukraine declaring a ceasefire or truce, and the Fed backing off its hawkish rhetoric.

Unfortunately, none of those events are likely in the near term, and until some of them at least partially occur, it’ll be tough for stocks to mount a real rally. Regarding earnings, yes, they can help if they are great, but the cause of this current air pocket is macro-growth concerns, and good earnings won’t erase those.

How bad could it get? In the April Market Multiple Table, we put a “Gets Worse If” target of 3,763, based on a 17X-18X multiple of current year earnings. Interestingly, that’s also around the level where most analysts think the “Fed Put” would reappear.

We continue to think that’s an appropriate level to look for material support. That’s another 10.3% from current levels, which would put the S&P 500 close to -20% YTD.

Should we raise cash? There’s no doubt that the prospects for a global slowdown are being driven higher by China’s Covid-19 policies and the ongoing Russia/Ukraine war. And in that respect, downside risks are rising.

That said, the macroeconomic environment hasn’t deteriorated 7% in four trading days, so we view this drop as overdone given actual fundamentals. Selling when markets overreact to fundamentals isn’t a historically good strategy, so we will hold on here and take the pain. At these levels, the S&P 500 is trading at 18.5X this year’s earnings and around 17X 2023 earnings. And given corporate commentary and earnings that are pretty solid, those valuations are generally fair.

Now, I wouldn’t say we’re bullish, but we don’t think this recent drop is representative of current fundamentals, and if our goal is to raise cash, we’d prefer to do it more in the middle of the 4,170-4,600-trading range, and not here.

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