The S&P 500 has performed poorly this year, down about 6.4%. This past Monday, it got scary in a Harry Potter sort of way: The benchmark experienced a death cross.
A death cross occurs when the S&P’s 50-day moving average slips below its 200-day average. This one saw the S&P’s 50-day average drop to 4465, below the 200-day 4467. This suggests something is awry in stocks, not a surprise. In normal times, particularly when stocks are rising, the average of recent prices is higher than the 200-day average, which includes prices at lower levels.
That’s not the case now. Stock prices have slipped below their long-term trend as economic risks pile up. The Ukraine war has led to sanctions on Russian commodities, from oil to gas to wheat, squeezing global supplies and raising prices. Even before the war, inflation was taking off, putting pressure on central banks to get prices under control, a process the Federal Reserve began on Wednesday. China is struggling with Covid.
Still, there’s good news here. The appearance of a death cross may be a time to buy. Historically, the S&P 500 tends to post gains in the 12-month period following an initial close of a death cross. According to Fundstrat research, gains occur about two-thirds of the time 12 months after a death cross. When losses occur, it’s often just before recessions. Dow Jones Market Data says that in 53 death-cross episodes, the average gain was 6.3%.
To be sure, the average time in a death cross was 155 trading days. The last time that occurred was March 30, 2020, as the pandemic set in. The S&P then rose more than 55% in the following year.
Last Week
It’s Witchcraft
The 10-year Treasury yield rose over 2% on inflation jitters, but stocks rose on hopes for a Ukraine cease-fire, while oil slid below $100 a barrel on new Covid woes, particularly in China. Trading was turbulent, then rallied after the Federal Reserve raised rates. Friday was a triple-witching day, with options expiring. On the week, the Dow Jones Industrial Average rose a big 5.5%, to 34,754.93; the S&P 500 soared 6.2%, to 4463.12; and the battered Nasdaq Composite sailed 8.2%, to 13893.84.
Talks, Bombs, and Bonds
Russia bombed a base near the Polish border. The U.S. said Russia asked China for weapons and warned Beijing to back off. Russia made $117 million in bond payments, and JPMorgan Chase processed it after getting U.S. permission, avoiding default. The Iran nuclear deal staggered to life after Russia dropped objections over U.S. sanctions. Ukraine President Zelensky spoke remotely to Congress; President Biden offered more weapons as Russia pounded cities and Ukraine counterattacked. The U.S. warned of Russian bio or chemical attacks. Cease-fire talks continued.
Fed Day: All Rise
The Fed’s policy-setting committee met and voted 8 to 1 for what Chairman Jerome Powell had said he favored: a 0.25% rate rise, the first since 2018. Separately, West Virginia Democratic Sen. Joe Manchin said he opposed the nomination of Sarah Bloom Raskin over her climate-change stance. Raskin then pulled out. The Bank of England raised rates a third time.
China: Under the Weather
Chinese stocks, led by Tencent and Alibaba , plunged, then rallied as the government promised support. China put Shenzhen and the province of Jilin on lockdown, as the country struggled to contain Covid. The Shenzhen lockdown hit tech manufacturing, including iPhone maker Foxconn , and put into doubt the country’s 5.5% growth estimate. Shanghai and notably Hong Kong struggled with rising death rates, particularly among the elderly.
Data Beats
Jobless claims, housing starts, building permits, and a Philadelphia Fed manufacturing index all beat forecasts.
Annals of Deal Making
Telecom Italia began talks with KKR , four months after the buyout firm approached it. KKR’s bid values TI at $12 billion, a 75% premium to the prior Friday’s stock price. TI’s biggest shareholder Vivendi recently installed a new CEO, Pietro Labriola, who wants to split the company and began talks to sell its fixed-line assets to state-controlled Open Fiber…JD.com said it would buy a Chinese logistics company Deppon Logistics for $1.4 billion…The Wall Street Journal reported that a consortium of private-equity buyers, including Elliott Management and Brookfield Asset Management, were in talks to buy TV-ratings company Nielsen for some $15 billion, including debt…Amazon.com closed its $8.4 billion buy of movie studio MGM .
Write to Jacob Sonenshine at [email protected]
