LONDON – Investors seeking value in the stock market can “deceive themselves” during the ongoing recession, according to Sean Corrigan, director of Cantilon Consulting.
Concerns that the war in Ukraine and other supply disruptions could lead to a slowdown in the global economy and the need for central banks to aggressively raise interest rates to curb inflation have led to a sell-off in global markets in recent months.
The S&P 500 Thursday session fell 18% from its all-time high, reaching bear market, while pan-European stocks fell nearly 12% in the 600-year-to-date and MSCI Asia ex-Japan fell 18.62% year-over-year since then.
Tech-and-growth stocks, which are most vulnerable to sharp rise in interest rates, have fallen sharply, especially as the tech-heavy Nasdaq 100 fell more than 29% from last year’s record high.
The negative start of the year followed a rally that pushed global stocks to record heights from the depths of the early coronavirus crash in March 2020, with growth firms and tech titans leading the charge.
Some investors have chosen the recent weakness as a buying opportunity, but Corigan has suggested that bull-run confidence could be misplaced due to the macroeconomic situation.
In a note on Friday, he suggested that since a significant portion of the holders of such well-performing growth stocks so far this year were using borrowed capital, others “could be swept away when the tide finally starts flowing.”
“People always say that the market goes down on profit – it goes down on the perception of loss. The person who sells at the top sells to the next two boys, who understand that it is not going to hold on, who sells to the next boys and If there is leverage between them, we are in trouble, “he told CNBC’s Squawk Box Europe on Friday.
“And if they’re losing a lot of money in a market that may be somewhat peripheral of the real thing, there’s another old expression – pulling flowers to water the weeds. You sell or try other things to pay your margin calls and try to restructure our finances. , So that it can spread, and we are clearly at that stage right now. “
Despite the risk-averse attitude prevailing late, the S&P 500 remained 16% higher than its pre-coveted high in early 2020, and Corrigan argued that the world is not in a better place than that stage.
“Even those who are desperately trying to convince themselves that somewhere down here, there must be a price now because the price of asking is low, they are probably still cheating themselves,” he said.
In the face of shortages and spiraling costs for “the basic necessities of life” such as energy and food, which are weighing on family incomes around the world, Corigan claims that consumer focus has shifted away from companies whose shares enjoyed the most in the post-Covid rally.
“We have energy problems, we have food problems, we have problems with all the basic things in life. Are you thinking about spending $ 2,000 to buy a bike to paddle in your own home right now? , ”He said.
“But how many more types of companies like this are now somewhat redundant for the fundamental problems of existence that we’ve probably faced for two generations for the first time?”
Shares of Peloton have fallen nearly 60% since the beginning of the year.
Degradation of initials argument
Other speculative assets, such as cryptocurrency, have also cited growth concerns as a primary fear for investors, while bonds and the dollar – the traditional safe haven – have rallied.
In a research note on Friday, Barclays Head of European Equity Strategy Emanuel Cow said common denominator-based arguments that keep investors in equities – such as TINA (no alternative), BTD (buy sink) and FOMO (fear of missing)) – are on the rise. The policy is being challenged by trade-offs.
In recent months, the central bank’s policy and rhetoric have been a key driver of day-to-day market operations as investors assess the pace and intensity of policymakers’ efforts to reduce fugitive inflation.
After adopting an unprecedentedly loose monetary policy to support the economy through the epidemic, central banks now face the daunting task of stifling that stimulus in the face of new growth threats.
“Without a trigger to reduce recessionary concerns, it could go on, but the panic button hasn’t hit yet. And when high speculative assets have collapsed, we see little evidence that retail (investors) are leaving equity,” Kau argued.
Federal Reserve Chairman Jerome Powell acknowledged on Thursday that the US Federal Reserve could not guarantee a “soft landing” for the economy, provided it kept inflation in check without starting a recession.
Corrigan, however, does not expect the fruits of this confidence in the bull market from retail investors.
“For the assumption that inflation (i.e. inflation) will soon decrease significantly, it still seems a remote possibility that, undoubtedly, every minor termination will be seized as a ‘buying opportunity’,” he said in a Friday note.
“The market could turn into a meat grinder of hopeless hope.”