Strategist says market may become a ‘meat-grinder of forlorn hope’

LONDON – Investors seeking value in the stock market during the ongoing downturn may be “deceiving themselves,” said Sean Corrigan, president of Cantillon Consulting.

Fears that central banks will have to raise interest rates aggressively to curb inflation – at the risk of suppressing growth as the global economy is simultaneously hit by the war in Ukraine and other supply shocks – has led to widespread sell-offs in global markets in recent months. .

The S&P 500 closed Thursday’s session 18% lower than its all-time high and is approaching bear market territory, while the pan-European Stoxx 600 is down nearly 12% since the start of the year and the MSCI Asia ex-Japan 18.62 % has lost since the turn of the year.

Technology and growth stocks, which are most vulnerable to sharp rises in interest rates, have seen particularly sharp declines, with the tech-heavy Nasdaq 100 falling more than 29% from its record high last year.

The negative start to the year followed a rally that had propelled global equities from the depths of the first coronavirus crash in March 2020 to record highs, with growth companies and tech titans leading the way.

Some investors have chosen to view the recent weakness as a buying opportunity, but Corrigan suggested that confidence in the bull run may be misplaced given the macroeconomic situation.

In a note Friday, he suggested that since a significant proportion of growth stock holders who had performed so well up to this year used borrowed capital, others “could be wiped out when the tide finally starts to ebb.”

“People always say that the market comes down to taking a profit – it comes down to realizing a loss. The guy who sells at the top sells to the next two guys, who realize it won’t hold, who sell to the next guys and if there are any of those are leverage, we’re in trouble,” he told CNBC’s “Squawk Box Europe” on Friday.

“And if they lose a lot of money in one market, which may be a bit peripheral to the real thing, there’s another old expression – pulling the flowers up to water the weeds. You sell the other to get your margin calls.” to pay or to try to restore our finances so that it can spread, and we are clearly at that stage right now.”

Despite risk-off sentiment that has prevailed of late, the S&P 500 remains more than 16% above its pre-Covid high in early 2020, and Corrigan argued the world is no better off than it is at that stage .

“Even people who are desperately trying to convince themselves that there must be value below here somewhere just because the asking price is lower may be fooling themselves,” he said.

Given the shortages and rising costs of “staples of life” such as energy and food, which are putting pressure on household incomes around the world, Corrigan argued that consumer focus has shifted away from the companies whose stocks have enjoyed the most. the post-Covid rally.

“We have problems with energy, we have problems with food, we have problems with all of life’s basic necessities. Is this a time when you’re worried about spending $2,000 to buy a bike to use in your own home? kick away? Well, clearly not, that’s why the Platoon was crushed,” he said.

“But how many other types of businesses are now somewhat redundant to the basic problems of existence that we may face for the first time in two generations?”

Peloton shares are down nearly 60% since the beginning of the year.

Deteriorate Arguments Acronym

Other speculative assets, such as cryptocurrencies, have also shrunk as growth concerns override inflation concerns as investors’ biggest fears, while bonds and the dollar — traditional safe havens — have soared.

In a research paper Friday, Barclays Head of European Equity Strategy Emmanuel Cau said the typical acronym-based arguments that investors hold in stocks — such as TINA (there is no alternative), BTD (buy the dip) and FOMO (fear of missing out) — were challenged by the deteriorating trade-off between growth policies.

Central bank policies and rhetoric have been a major driver of day-to-day market action in recent months as investors look to assess the speed and severity with which policymakers will tighten to contain runaway inflation.

After adopting unprecedentedly accommodative monetary policies to support economies during the pandemic, central banks now face the arduous task of unwinding that stimulus amid a new barrage of threats to growth.

“Without a trigger to ease recession fears, this may continue, but the panic button hasn’t been hit yet. And while highly speculative assets have collapsed, we see little evidence of retail (investors) giving up stocks,” Cau argued.

Federal Reserve Chair Jerome Powell acknowledged Thursday that the US central bank cannot guarantee a “soft landing” for the economy, in terms of controlling inflation without triggering a recession.

However, Corrigan does not expect this confidence in the bull market from retail investors to bear fruit.

“As for the idea that inflation (i.e. price increases) will soon decline significantly, that still seems a distant prospect, although no doubt any small decrease will be seized as a ‘buying opportunity,'” he said in Friday’s note. .

“The market could become a meat grinder of lost hopes.”

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