NEW YORK – A week of hefty selling has shaken U.S. stocks and bonds and investors are preparing for further suffering to come.
Wall Street banks are adjusting their forecasts in order to accommodate a Federal Reserve that shows no signs of slowing down which suggests that it will continue to tighten to combat inflation following another rate hike that has been a major market shock this week.
The S&P 500 has fallen over 22% over the course of this year. It briefly fell below its mid-June close low of 3,666, ending the sharp increase in summer of U.S. stocks before paring losses and closing higher than that mark.
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With the Fed determination to raise rates much higher than previously anticipated, “the market right now is experiencing a crisis of confidence” stated Sam Stovall, chief investment strategist at CFRA Research.
Should the S&P 500 closes below the mid-June’s low in the coming days this could trigger another period of aggressive selling Stovall added. The index could fall down to 3,200 levels, which is in line with the historical average decline of bear markets, which are associated with recessions.
Although recent data have shown that a U.S. economy that is quite strong, investors are worried that the Fed’s tightening could result in a decline.
A downturn in the bond market increased tension on stock prices. The yields of the benchmark 10-year Treasury and inversely to the price, last week stood at 3.69 percent, the highest since 2010.
Higher yields on bonds issued by government could reduce the appeal of stocks. Tech stocks are especially sensitive to yield increases because their value is heavily dependent on future earningsthat is discounted more as bond yields increase.
Michael Hartnett, chief investment strategist at BofA Global Research, believes the rising inflation rate could cause U.S. Treasury yields as at 5% or more over the next few months, which could accelerate the market selloff, both in bonds and stocks.
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Related: As interest rates rose, investors sold U.S. stocks.
“We believe that the new yields that are at record highs translate into new lows for stocks,” the economist said, adding an increase in it could be that the S&P 500 will fall as to 3,020 at which point investors can “gorge in equities.
Goldman Sachs (NYSE:GS), in turn, has reduced its year-end goal in its S&P 500 by 16% to 3,600 points, down from 4,300 points.
“Based upon our discussions with our clients that a majority of equity owners have embraced the belief that a tough landing is likely,” wrote Goldman analyst David Kostin.
Investors are seeking signs of a capitulation level which could indicate that the bottom is close.
The Cboe Volatility Index, known as Wall Street’s fear gauge this Friday was over 30, the most high since the middle of June, but still below the average of 37 which has seen a rumble of selling in previous market downturns since 1990.
Bond funds reported withdrawals of $6.9 billion in the week from Wednesday to Thursday, while $7.8 billion was withdrawn from equity funds, and investors ploughed $30.3 billion in cash BofA stated in its research report that cited EPFR data. The mood of investors is among the worst since the global financial crisis of 2008 according to the bank.
Kevin Gordon, senior investment research manager at Charles Schwab (NYSE:SCHW) believes there’s a lot more downside ahead, as central banks have been tightening their monetary policy in the global economy, which already is slowing.
“It will take longer to come out of the rut, not only due to the global slowdown but also because it is because the Fed along with other central bankers are stepping to the struggling economy,” Gordon said. “It’s an unbalanced mix for the risky assets.”
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However there are some of the people on Wall Street say the declines could be excessive.
“Selling is becoming increasingly indiscriminate,” wrote Keith Lerner co-chief investment officer for Truist Advisory Services. “The increasing likelihood of breaking the June S&P500 price low might be just what will trigger more anxiety. Fear can lead to lower prices in the short-term.”
The most important indicator to be watching in the coming weeks is the extent to which estimations of earnings for corporations decline according to Jake Jolly, senior investment strategist at BNY Mellon (NYSE:BK). In the meantime, S&P 500 is currently trading at 17 times the estimated earnings, far above its historical average. This indicates that a recession has not yet priced in the market, said Jolly.
A downturn could cause on the S&P 500 to trade between 3,500 to 3,500 by 2023. Jolly said.
“The only way we can see earnings growing is that the economy can stay out of recession, and at the moment, that isn’t the odds-on favourite,” he said. “It’s extremely difficult to be optimistic about equity markets until the Fed creates an easy landing.”
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