has performed so poorly this year that it is now trading at a scary high. This usually presents an attractive opportunity for longer-term investors.
The benchmark market index, down more than 11% over the year, has just reached a “death cross”. This is when the 50-day moving average of the index falls below the 200-day number.
It is a signal that something is happening in the market, if someone needed more proof. Normally, when stocks are rising, the recent price average is above the 200-day figure because the longer-term figure includes levels when stocks were lower.
Stock prices have fallen below their long-term trend as investors consider the current formidable risks to the economy. The Russian-Ukrainian war resulted in sanctions on Russian commodity exports that reduced the supply of those commodities on the world market, causing prices to skyrocket.
Consumers could thus reduce their expenses. Even before Russia’s attack, inflation was taking off, prompting central banks to slow the economy in order to control prices. Already, central banks are expected to raise interest rates several times this year.
The S&P 500’s death cross lands the index’s 50-day moving average at around 4,465. That’s below its 200-day moving average of 4,467. index closes in a death cross is that it ends Monday below 4,377; it was at 4,199.90 by early afternoon.
While this makes things bleak in the stock market, it’s probably a good time for longer-term investors to buy stocks. Historically, the S&P 500 has tended to post impressive gains in the 12-month period following an initial close in a death cross. Based on the 53 times the index has closed in death cross territory, the average gain over that period is 6.3%, according to Dow Jones Market Data.
Certainly, the index finger may remain in a death cross for some time; the average period is 155 trading days. But the gains are materializing. The last time the index closed in death territory was March 30, 2020, when it felt like the sky was falling as the pandemic took hold. From that point, the index gained more than 55% for the following year.
The fact is that at some point, the macroeconomic risk that drives stocks down is fully reflected in their prices. And as long as corporate earnings continue to grow, stocks will start rising again at some point.
Corrections & Amplifications: The average gain for the S&P 500 in the 12 months following an initial close in death cross territory is 6.3%. An earlier version of this article incorrectly stated that the gain was 50.7%.
Write to Jacob Sonenshine at [email protected]