Investors are wondering how the ‘uncharted’ sell-off in US stocks ends

Investors are wondering how the ‘uncharted’ sell-off in US stocks ends

By David Randall

NEW YORK (Reuters) – After a week of heavy selling, U.S. stocks and bonds have emerged lower in the market, with many investors bracing for more pain ahead.

Across Wall Street, banks are trying to adjust their forecasts to take into account a Federal Reserve that shows no evidence of letting up in its fight against inflation after delivering another rate hike pressured the market this week and signaling that tighter monetary policy is emerging.

Technical indicators that were once reliable are falling by the wayside. The S&P fell below its mid-June low of 3,666 on Friday afternoon, erasing a sharp summer retreat in US stocks – the first time in history the index broke a new low after wiping out more than half of its losses .

A flow in bond markets added to the pressure on stocks — the yield on the benchmark 10-year Treasury, which moves inversely to prices, was 3.67%, the highest level since 2010.

“These are uncharted waters,” said Sam Stovall, chief investment strategist at CFRA Research. “The market is now going through a crisis of confidence.”

The fresh low is likely to trigger another wave of aggressive selling, which could send the index as low as 3,200, a level consistent with the historical average of bear markets that coincide with recessions, Stovall said. . Although recent data has shown that the US economy is relatively strong, investors are concerned that the Fed’s 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 as high as 5% over the next five months, fueling the sell-off in both stocks and bonds.

“We say new highs in yields and new lows in stocks,” he said, estimating that the S&P 500 will fall as low as 3,020, at which point investors should “gorge” into equities.

Meanwhile, Goldman Sachs cut its year-end target for the S&P 500 by 16% to 3,600 points from 4,300 points.

“Based on our discussions with clients, the majority of equity investors have accepted the view that a hard landing scenario is inevitable and their focus is on the timing, size and duration of a potential downturn and investment strategies for that view,” wrote an analyst Goldman David Costin.

Meanwhile, investors are looking for signs of a tipping point that would indicate a bottom is near.

Cboe’s volatility index, known as a gauge of Wall Street’s fear, shot above 30 on Friday, the highest point since late June but below the average level of 37 that has marked sell-off crescendos in past market declines since 1990.

Bond funds recorded outflows of $6.9 billion in the week to Wednesday, while $7.8 billion was withdrawn from equity funds and investors plowed $30.3 billion into 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 downside is 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 because the Fed and other central banks are wandering into the slowdown,” Gordon said. “It’s a toxic mix for risk assets.”

A key signal to watch in the coming weeks is how sharply estimates of corporate earnings fall, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 is currently trading at about 17 times forward earnings, well above the historical average, suggesting the market has not yet priced in a recession, he said.

A recession would likely push the S&P 500 to trade between 3,000 and 3,500 in 2023, Jolly said.

“The only way we see non-contractual earnings is if the economy is able to avoid a recession and right now that doesn’t seem to be your best bet,” he said. “It is very difficult to be optimistic about equities until the Fed engineers a soft landing.”

(Reporting by David Randall; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Nick Zieminski)

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