At the time of writing, the futures contracts for the S&P 500 are extending February’s declines into this month.

At the time of writing, the benchmark index for US stock markets has gone below the widely-watched 100-day and 200-day simple moving averages (SMA), having earlier already broken below the uptrend line from October’s trough.

Why are US stocks falling?

Generally, the US stock market fears the prospects of interest rates moving even higher or faster than expected.

After all, that was the S&P 500’s enemy #1 last year. And such fears have been revived.

For comparison, recall that coming into 2023, the S&P 500 initially enjoyed a stellar start to the year on hopes that the Federal Reserve won’t raise interest rates past 5% (the upper bound of the Fed funds rate now stands at 4.75%).

However, in February 2023, investors were shown data that point to still-robust hiring in the US labour market, as well as stubbornly-elevated US inflation, despite the Fed having already raised rates by 450 basis points over the past 12 months.

The recent economic data suggests that the Fed has to now hike its benchmark rates up to 5.5% in order to subdue inflationary pressures.

Hence, with the higher peak for US interest rates being forecasted, stocks duly unwound some of their January gains, bringing the S&P 500 now to its lowest levels in 6 weeks.
 

What’s next for the S&P 500?

Further sustained declines may soon invite equity bears to test the mid-January low at 3885.5.

After that, stronger support should arrive around the 23.6% Fibonacci retracement from the S&P 500’s record high in November 2021 through to its October 2022 low.

If that 23.6% Fib level is reached, that would essentially wipe out all of the S&P 500’s year-to-date gains, which currently stand at 2.9%.

How long before the next S&P 500 record high?

Overall, the S&P 500 has gone 290 days without a new record high. This is its longest stretch with a fresh peak since the Global Financial Crisis (GFC)

But for proper context, these 290 days and counting are still dwarfed by:

• the 1,375-day stretch between October 2007 and March 2013 (GFC)
• the 1,802-day stretch during the March 2000 – May 2007 (dot-com bubble).

Ultimately, markets will have to get used to the eventual peak for US interest rates, and hope that the Fed rate hikes do not incur too much damage to the world’s largest economy as well as Wall Street earnings along the way.

Only then can the S&P 500 embark on a sustainable run chasing after a new record high.

And that might be a 2024 story if all goes well this year.

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