‘Uncharted’ sell-off in US stocks has investors wondering when the pain will end

‘Uncharted’ sell-off in US stocks has investors wondering when the pain will end

By David Randall

NEW YORK (Reuters) – A week of heavy selling sent U.S. stocks and bonds to new bear market lows, with many investors bracing for more pain ahead.

Across Wall Street, banks are scrambling to adjust their forecasts to take into account a Federal Reserve that doesn’t appear to be giving up on its fight against inflation, after marking another rate hike from the market this week and signaling a tighter monetary policy. politics in the future.

Once reliable technical indicators are falling by the wayside. The S&P fell below its mid-June low of 3,666 on Friday afternoon, erasing a sharp summer rally in U.S. stocks – the first time in history that the index broke a new low after erasing more than half its losses.

The devastation in bond markets added to the pressure on stocks — yields on the benchmark 10-year Treasury, which moves inversely to prices, recently hit 3.67%, their highest level since 2010.

“These are uncharted waters,” said Sam Stovall, chief investment strategist at CFRA Research. “The market is currently going through a crisis of confidence.”

The new low will likely trigger another wave of aggressive selling, potentially sending the index to 3,200, a level in line with the average historical decline in recessionary bear markets, Stovall said. While recent data shows the US economy is comparatively strong, investors worry that the Fed’s tightening will lead to a recession.

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation will likely push U.S. Treasury yields up to 5% over the next five months, exacerbating the selloff in both stocks and bonds.

“We say new highs in yields equals new lows in stocks,” he said, estimating that the S&P 500 will fall as low as 3,020, at which point investors should pound stocks.

Goldman Sachs, meanwhile, cut its year-end target for the S&P 500 by 16% to 3,600 from 4,300.

“Based on discussions with our clients, the majority of equity investors have taken the view that a hard landing scenario is inevitable and their focus is on the timing, size and duration of a potential downturn and investment strategies for that prospect wrote Goldman analyst David. Costin.

Investors, meanwhile, are looking for signs of a capitulation point that would indicate a bottom is near.

The Cboe Volatility Index, known as Wall Street’s fear gauge, on Friday soared above 30, its highest point since late June but below the average level of 37 that has marked selling highs in previous market declines since 1990.

Bond funds recorded outflows of $6.9 billion in the week through Wednesday, while $7.8 billion was pulled from equity mutual funds and investors plowed $30.3 billion into cash, BofA said in a research note cited by EPFR data. Investor sentiment is the worst since the global financial crash of 2008, the bank said.

Kevin Gordon, senior director of investment research at Charles Schwab, believes there is more downside ahead as central banks tighten monetary policy in a global economy that already appears to be weakening.

“It’s going to take us longer to get out of this mess, not just because of the slowdown around the world, but because the Fed and other central banks are moving toward a slowdown,” Gordon said. “It’s a toxic mix for risk assets.”

A key signal to watch for in the coming weeks will be a sharp decline in corporate earnings estimates, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 is currently trading at about 17 times expected earnings, well above its historical average, which suggests the recession has yet to be priced into the market, he said.

A recession will likely push the S&P 500 to trade between 3,000 and 3,500 in 2023, Jolly said.

“The only way we see earnings not shrinking is if the economy is able to avoid a recession, and right now that doesn’t look in favour,” he said. “It’s very hard to be bullish on stocks until the Fed plans a soft landing.”

(Reporting by David Randall; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Nick Zieminski)

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