The key to a recovery in the US stock market is an end to the Russia-Ukraine war, according to DataTrek Research.
DataTrek highlighted that the stock market could see more downside during the summer months after a weak start to the year.
“The best chance the S&P has at staging a comeback is a resolution to the Russia-Ukraine conflict and a drop in oil prices as a result,” DataTrek said.
The stock market’s tough start to 2022 doesn’t bode well for the rest of the year as momentum continues to stay negative, DataTrek Research said in a note on Tuesday, warning that an end to the war in Ukraine may be the necessary ingredient for a renewed rally.
The S&P 500 is down more than 16% year-to-date, while the Nasdaq 100 has entered a bear market and is down 25% over the same time period. The sizable sell-off, combined with the old Wall Street adage “sell in May and go away,” suggests stocks could continue to fall over the summer months.
“History says losing years for the S&P usually start with a down January-May sequence like this year – down 5.8% on average – and are followed by another 9.3% average decline during the next 5 months,” DataTrek co-founder Jessica Rabe said.
And if the S&P 500 enters the fall months as weak as it is today, there will be little chance that it can recoup all of its losses in the last two months of the year, according to DataTrek. That is unless a geopolitical event combined with oversold conditions leads investors to buy risk-assets.
“It’s important to note that the best snapbacks in the last two months of the year happened after periods of oversold conditions from geopolitical shocks: 1962 (+11.6%, after the end of the Cuban missile crisis), 1990 (+8.6%, post-Iraqi invasion of Kuwait) and 2001 (+8.3%, post-9/11),” Rabe said.
That means the one big catalyst that could reverse most, if not all of the stock market’s losses by the end of 2022, is a resolution to Russia’s war against Ukraine, Rabe said. Such a resolution would likely ease investor concerns about an escalation of war between Russia and Western countries, in addition to lowering oil prices and helping ease inflation.
But comments from the US Director of National Intelligence Avril Haines on Tuesday suggest that could be wishful thinking, as she told lawmakers that Russian President Vladimir Putin is preparing for a prolonged war against Ukraine.
“Ultimately, history shows the best chance the S&P has at staging a comeback is a resolution to the Russia-Ukraine conflict and a drop in oil prices as a result,” Rabe said.
But unless the conflict reaches some resolution, the “sell in May and go away” investment strategy will likely prove successful in 2022 given the already weak performance from stocks, according to DataTrek.
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