We recently discussed the decline in the dollar relative to the parade of people trying to get clicks and views by promoting the “death of the dollar.” The next big bearish headline will be the “death cross” of the S&P 500 Index (SPX). It sounds ominous when couched in those terms, but all it means is that the 50-dma has crossed below the 200-dma, notes Lance Roberts, editor of Bull Bear Report.
I don’t want to dismiss the importance of that negative crossover, as it does provide significant overhead resistance to market prices during its tenure. But also, as is ALWAYS the case, the crossover will end and markets will begin to rise once again.
For investors, the “death cross” is the duration during which such negative price pressure will remain applied to the market. Sometimes, the “death cross” is associated with more significant bear markets; however, it usually tends to occur in shorter-term corrections. The chart below shows the S&P 500 versus historical “death crosses.”
There were three periods when the “death cross” signaled a larger risk-off environment. In 2000, it was the beginning of the Dot.com crash...in 2008, the “Great Financial Crisis”...and in 2022, as the Federal Reserve hiked rates dramatically. Other than those three periods, “death crosses” triggered near-correction period lows.
What is important is to separate out the difference between an “event” driven downturn and a “structural” downturn. 2000, 2008, and 2022 were structural in nature as companies collapsed during the Dot.com crisis, banks were on the brink of failure in 2008, and recession risks were elevated with high inflation in 2022.
Those structural events cause a significant repricing of earnings and valuations, requiring more time for markets to realign with future expectations. “Event-driven” downturns like the Eurocrisis in 2012, Brexit in 2016, and the Fed’s taper tantrum in 2018 typically evoke short-term market corrections as the markets quickly return their focus to future expectations once the event passes.
While the current downturn and triggering of the “death cross” are certainly worrisome, this “event-driven” downturn will quickly pass as economic policy uncertainty fades. As the Trump Administration begins repealing tariffs and negotiating deals with China, the relief of tariff fears will become supportive in deeply negative market sentiment and oversold conditions.
The point is not to overreact to the surge in “death cross” stories.
