The
S&P 500
has gotten hit hard, dropping close to the key level of 4200. If it can’t hold steady there, steep losses from here are likely.
The index has dropped just over 8% from its intraday high of just over 4607, hit in late July. The main driver has been the Federal Reserve’s plan to keep short-term interest rates high for a longer period than markets had previously anticipated, as the central bank continues to try to tamp down inflation. Elevated rates have also caused the 10-year Treasury yield to surge recently, and higher long-dated bond yields make future profits for companies less valuable.
Now, the S&P is at just over 4200. That’s key because, when the index rallied to get close to that level in 2022 several times, sellers came in at 4200 to knock it lower. At the time, investors were concerned about the economic impact of rising rates. Early this year, buyers finally came into the market at 4200, sending the S&P 500 surging from there, as markets anticipated a stabilization in rates and a growing economy.
If the index holds the line at 4200, that would indicate that buyers are still interested in stocks at that level and the S&P 500 could keep rising. If it breaks below that level, that signals those buyers have gone away and the market is losing confidence in the macroeconomic outlook. Such selling would make harsher losses more likely. The next level of buying “support” for the S&P 500 is around 4000, a level that would represent nearly a 6% drop from current levels.
That could be enough downside to keep even long-term investors away from the market, and yet there’s no guarantee that the index will hold at 4000. The index did trade at just over 3800 earlier this year. If the losses below 4200 are steep enough—think about 1% drops for the S&P 500 in one day—the index could be headed for that level.
The 3800 area is a major support level. Buyers came in at that level four times since the second half of 2022. A drop to that point wouldn’t be out of the question, however, if the 4200 level doesn’t hold strong.
Watch what the market does around 4200. It will be very telling.
Write to Jacob Sonenshine at [email protected]
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