By David Randall
NEW YORK (Reuters) – A week of heavy selling has sent US stocks and bonds to new bear market lows, with many investors bracing for more pain in the future.
All over Wall Street, banks are struggling to adjust their forecasts to account for a Federal Reserve showing no evidence of abandoning its fight against inflation after launching another market-shattering rate hike this week and signaling that future monetary policy will be tightening.
Once reliable technical indicators fall by the wayside. The S&P dipped below the mid-June low of 3,666 on Friday afternoon, wiping out a sharp summer rally in US stocks — the first time in history that the index hit a new low after wiping out more than half of its losses.
A bond market turmoil added to the pressure on equities: 10-year Treasury yields, which are inversely proportional to prices, recently stood at 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 is likely to spark another wave of aggressive selling, potentially pushing the index to 3,200, a level in line with the average historic decline in bear markets that coincide with recessions, Stovall said. While recent data has shown that the US economy is relatively strong, investors worry that the Fed tightening will lead to a downturn.
Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation is likely to push US Treasury yields up to 5% over the next five months, exacerbating sell-offs in both stocks and bonds.
“We’re saying new highs in returns equal new lows in stocks,” he said, estimating that the S&P 500 will fall to 3020, after which investors should be “popping” with stocks.
Goldman Sachs, meanwhile, lowered its year-end target for the S&P 500 by 16% from 4,300 points to 3,600 points.
“Based on our client discussions, a majority of equity investors believe that a hard landing scenario is inevitable and their focus is on the timing, magnitude and duration of a potential recession and investment strategies for that outlook,” Goldman analyst David wrote. . costin.
Investors, meanwhile, are looking for signs of a capitulation point that would indicate a bottom is near.
The Cboe volatility index, known as the Wall Street fear meter, shot above 30 on Friday, its highest since late June but below the average level of 37 that has seen spikes in sales in past market declines since 1990.
Bond funds posted $6.9 billion outflows in the week to Wednesday, as $7.8 billion was removed from equity funds and investors put $30.3 billion in cash, BofA said in a research note citing EPFR data. Investor sentiment is the worst since the 2008 global financial crash, the bank said.
Kevin Gordon, senior investment research manager at Charles Schwab, believes more downward spirals lie ahead as central banks tighten monetary policy in a global economy that already appears to be weakening.
“It will take us longer to get out of this rut, not only because of the slowdown around the world, but also because the Fed and other central banks are catching up,” Gordon said. “It’s a toxic mix for risky assets.”
An important signal to watch for in the coming weeks is how sharply corporate earnings estimates are falling, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 is currently trading at about 17 times expected earnings, well above the historical average, suggesting a recession has not yet been priced into the market, he said.
A recession would likely force the S&P 500 to trade between 3,000 and 3,500 by 2023, Jolly said.
“The only way we see earnings not shrinking is if the economy can avoid a recession and right now that doesn’t seem like the favorite,” he said. “It’s very difficult to be optimistic about equities until the Fed achieves a soft landing.”
(Reporting by David Randall; additional reporting by Saqib Iqbal Ahmed; editing by Ira Iosebashvili and Nick Zieminski)