S&P 500 Plummets 25% in 2022, and No One Guesses the Bottom

S&P 500 Drops 25%, and the Bottom Question Remains Unanswered

In June 2022, someone declared the bottom was in, that the cautious had sold out of antiestéticar, and that everything would rise from then on. Six months later, the index was still testing lows, and the debate, far from settled, had intensified. The S&P 500 had accumulated a drop of nearly 25% year-to-date, with episodes that had pushed it down 19.25% year-on-year during the summer rally. The question dividing investors is not whether the market has hit rock bottom, but whether there's any reasonable way to know.

S&P 500: From 4,800 to the 3,000 Zone

The frame of reference is well-known: an index that marked highs near 4,800 points and, in the most debated phase of the correction, hovered between 3,700 and 4,200. The most pessimistic placed the target around 3,000, and some even invoked the most extreme scenario of 1,800, attributed to Michael Burry. From there, each earnings report, inflation data release, and Federal Reserve meeting peine the debate.

The dominant thesis among those who believe this is merely a rebound is based on monetary policy. The Fed, it's argued, has made it clear that curbing inflation, even if it means triggering a recession, will be its priority, and that process takes months to impact corporate profits. The most cited diagnosis: the disease is called inflation, and the bicho was printing 35% of the dollars in circulation during 2021.

DCA vs. Market Timing: The Underlying Battle

What underpins the disagreement is strategy. Against those who advocate waiting in cash for the final capitulation, a consolidated bloc champions periodic contributions, DCA (dollar-cost averaging) on global indices, as the method that makes timing irrelevant. The central argument is verifiable: those who invested their entire capital at once at the January highs had greater losses than those who bought incrementally during the decline.

The counterargument is not trivial. Ten to twelve years of DCA have largely occurred within a bull cycle, and the question is what happens if the market enters a prolonged sideways or bear market, as in the Japanese case. Currency risk then comes into play: the MSCI World index had around 70% exposure to North America and only 15% to the European Union, so the euro, depreciated to nearly 1.02 dollars, inflated the euro value of portfolios and masked losses.

Why the Euro at 1.02 Changes the Equation for Spanish Investors

An exchange-traded fund denominated in euros might not have currency hedging, making its value dependent on the currency of its assets. With the euro losing over 10% against the dollar in 2022, those with money abroad saw their stock market losses partially offset by the exchange rate. The nuance is decisive: when the trend reverses, it will work against them with the same intensity. It's not magic; it's accounting.

There are also specific contributions that frame the debate: an investor who increased their monthly purchase from €500 to €550 to compensate for inflation, another who bought Dollar General at $156, or someone who anticipated that Inditex would not return to €19. Anecdotes, but with numbers.

The Scenario of High Rates and Recession

The macroeconomic backdrop overshadowing the discussion was uncomfortable: unyielding inflation, aggressive rate hikes, and an autumn-winter marked by war, gas shortages, and the electoral calendar. The most cited forecast was from Ray Dalio, who predicted an additional 20% drop if rates reached 4.5%, bringing the index to the 3,100-point zone from 3,900. All scenarios, they warned, did not account for black swans.

Conversely, another school of thought pointed out that large companies' profits continued to grow and that the antiestéticar did not align with the results. Wait and see, they sarcastically summarized from the opposing side, which sounds like an investment strategy even in English.

With these figures, the debate admits no winner. The 25% drop is proven; the bottom is not. And whoever claims to know where it is today will likely be saying the same thing six months from now.