a recession will determine the bottom of stocks

  • The stock market took a historic turn on Thursday after Russia launched its attack on Ukraine.
  • The Nasdaq 100 rose more than 3% on Thursday after initially falling more than 3%.
  • There hasn’t been a reversal like this since 2008, and whether a bottom has been reached is determined by this one factor.

The Nasdaq 100’s historic turnaround on Thursday shocked investors, with the tech-heavy index ending the day up more than 3% after falling 3% in early morning trading.

The 6% one-day range on the Nasdaq has not been seen since December 2008, according to a Friday statement from Susquehanna International Group’s Chris Murphy.

“In the last 30 years, there have only been 10 other reversal days like yesterday, all of which occurred during the Great Financial Crisis and dot-com crash,” Murphy said.

This does not bode well for optimistic investors as these market environments pointed to a classic


bear market

rally, with increases


volatility

and deep


liquidity

.

But according to Murphy, one factor will largely determine whether today’s stock market follows the same path as the dot-com bubble and the Great Financial Crisis, or whether the market has bottomed and will recover: economic activity


recession

.

“Historical precedent says we are [near the lows for this correction] if we avoid a recession,” he said.

And that’s definitely a possibility. The economy has continued to grow in a post-pandemic environment, with strong consumer balance sheets, corporate profits at or near records and millions more job vacancies than there are unemployed.

But there are several headwinds for the US economy that could exacerbate recent market volatility and lead to a prolonged downtrend in stocks and eventual recession.

“If war, inflation and the Fed push the US economy into recession, then historical precedent points to further downside,” Murphy said.

That view aligns with a Friday note from Bank of America, which warned a bear market is on the horizon in 2022 as the Fed hikes interest rates and shrinks its balance sheet in an economy experiencing slowing growth and persistent inflation.

But if the U.S. economy manages to continue growing amid heightened uncertainty surrounding Russia’s invasion of Ukraine and the potential for higher commodity prices prompting the Fed to hike rates, then Susquehanna said Thursday was likely to become a tradable bottom in the stock market achieved.

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