Selling in stocks to intensify as new 10% drop looms, survey finds

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(Bloomberg) – Brace for another plunge in the world’s most watched stock index as economic growth fears soar and the Federal Reserve embarks on its biggest policy tightening campaign in decades. decades.

As the S&P 500 flirted with a bear market last week and posted more than $1 trillion in losses, participants in the latest MLIV Pulse survey believe there is more pain ahead.

The gauge is expected to continue falling this year before hitting a low of around 3,500, according to the median projection of 1,009 respondents. That’s down at least 10% from Friday’s close of 3,901 – and a heartbreaking 27% drop from January’s high.

The Fed’s hawkish stance, supply chain chaos and escalating threats to the economic cycle are undermining confidence in the US corporate profit machine, while equity valuations continue to fall.

After the longest streak of weekly losses in more than two decades, only 4% of MLIV readers believe the S&P 500 has found a low for the year based on closing levels. And a handful see a historic rout moving towards 2,240 – retesting pandemic lows.

Fund managers have suffered a worse downturn in the Covid-induced tumult in 2020, but that’s cold comfort with projected losses of this magnitude.

“I still think the worst is not behind us,” Savita Subramanian, head of US equities and quantitative strategy at Bank of America Corp., told Bloomberg Television on Friday. “There’s a pervasive fog of negative feelings out there.”

Sobering earnings valuations from retailer Target Corp. and networking equipment company Cisco Systems Inc. saw investors take the ax to drive down stock prices last week. Short-term interest in a popular exchange-traded equity fund has jumped near levels last seen in March 2020.

The new safe-haven bid for US government bonds suggests fund managers are growing fearful of the economic trajectory, with lockdowns in China and the protracted conflict between Russia and Ukraine taking their toll.

While the collapse in retail stocks began last week, respondents turned more bearish during the latter part of the May 17-20 polling period. On average, MLIV professionals in the research, risk management, and sell-side community were more pessimistic than their peers in portfolio management and sell-side trading. (Average data may be skewed by outliers.)

Meanwhile, JPMorgan Chase & Co.’s Marko Kolanovic is playing down fears of a looming US recession and the median estimate from prominent Wall Street strategists suggests the index will end the year at 4,800, suggesting hope for a market rebound later this year. For Kristina Hooper, while an economic downturn is “pretty much built in”, she doesn’t see it happening.

“Sentiment is very negative, confirming the idea that we are closer to the bottom,” said the chief global market strategist at Invesco Ltd.

Yet, as central bankers seek to orchestrate a tightening of financial conditions to moderate the excesses, the risks of further inter-asset chaos are very real.

Asked what event will take place before the Fed shifts to dovish policy, 47% of respondents said they expected the S&P 500 to fall 30% from its peak, while ‘a similar proportion said unemployment in the US would rise to 6% from 3.6% currently.

More than 40% expect investment-grade credit spreads to explode beyond 250 basis points before the monetary easing cycle begins, while around one in four see US home prices fall by 20%.

Asked which asset class is likely to see further declines before the risk aversion cycle ends, readers overwhelmingly cited equities, while housing, commodities and bonds also received bids. .

Meanwhile, some 31% of respondents said an end to the Fed’s hike cycle would provide the biggest boost to growth and 27% indicated a preference for a scenario in which China ends its hike. zero-Covid policy.

About one in five said a bigger growth dividend would come if the war in Ukraine ended, and a similar proportion voted for a drop in crude oil to $70 a barrel.

  • For more market analysis, see the MLIV blog. For previous surveys and to subscribe, see NI MLIVPULSE.

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