The dawn of the US stock market may only be visible after the darkness.
According to the Zhongtong Finance APP, since July 31, the S&amp;P 500 index (SPX) has fallen by 7%, accompanied by a sharp drop in the US bond market. The yields on 10-year and 30-year US Treasury bonds have reached the highest level in 16 years.
On Thursday, the stock market continued to decline, with the S&amp;P 500 index falling by 0.13% and the Dow Jones Industrial Average slightly down, erasing all gains so far this year.
As expected, the market downturn has made investors increasingly pessimistic about stocks. In a research report on Wednesday, Ed Clissold, a strategist at Ned Davis Research, and London Stockton pointed out that extreme pessimism can serve as a contrarian indicator, and investor sentiment has now reached levels that typically indicate strong growth in the stock market.
They mentioned that since 1994, when NDR's daily trading sentiment composite index is in the extremely pessimistic zone, the annual growth rate of the S&amp;P 500 index is 26.7%.
However, the collapse of the US bond market has complicated the outlook, as it is rare for stocks and bonds to plummet at the same time. According to NDR's exclusive indicator, considering the significant drop in US bond prices, investors are more pessimistic about fixed income.
Clissold mentioned in a phone interview that for most of the past quarter-century, the trends in stock and bond prices have been opposite. In other words, stocks tend to rise as Treasury yields rise. The situation was different before the early 1990s, when rising yields often accompanied a decline in stocks. At that time, as now, rising yields indicated that the Federal Reserve needed to intervene to fight inflation. Clissold pointed out that recently, the rise in long-term yields has been seen as bullish for the stock market, as it indicates a weakening of deflationary forces.
Clissold and Stockton observed that when investors are more pessimistic about US bonds than stocks, US bonds tend to perform better.
They mentioned two possible scenarios:
In one possible scenario, concerns about stocks and US bonds &#34;will turn into a complete risk-averse environment, with US bond prices rising while stocks continue to adjust. This may be part of the reason for the stock market rebound at the end of the year.&#34;
Clissold pointed out that the sell-off in the stock market so far is not a &#34;complete sell-off event, and the decline has turned into a panic.&#34; This downturn is relatively &#34;normal and widespread&#34; by historical standards.
He said another possible scenario is that stocks and US bonds can rebound at the same time, although US bonds perform better.

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The dawn of the US stock market may only be visible after the darkness.

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