The market has quickly turned from ‘buy everything’ to ‘sell everything’
Author of the article:
Bloomberg News
Thyagaraju Adinarayan and Sagarika Jaisinghani
The sign for Wall Street outside the New York Stock Exchange. Photo by YUKI IWAMURA/AFP via Getty Images files So far, 2022 has been a year where just about everyone on Wall Street got it wrong. As did the United States Federal Reserve and a cadre of global central banks.
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Back in December, strategists at the world’s top investment firms such as JPMorgan Chase & Co. predicted the S&P 500 would gain five per cent in 2022. Economists saw the U.S. 10-year Treasury yield hitting two per cent on average by year’s end. And even Goldman Sachs Group Inc. lent credibility to the claims bitcoin was on track to hit US$100,000.
Yet six months later, an unprecedented confluence of shocks has ended one the most powerful equity bull markets and sent safe-haven government bonds and other assets spiralling. The S&P 500 is down 23 per cent, 10-year rates stand at 3.23 per cent and bitcoin has shed more than half its value.
The market has quickly turned from “buy everything” to “sell everything,” with the multi-year “there is no alternative” (TINA) phenomena in equities now gone. Unforeseen events including the Russia-Ukraine war have contributed to the highest consumer prices in 40 years. As a result, ultra-low interest rates and monetary stimulus — essentially the foundation of the post-pandemic rally — have evaporated as the Fed and its counterparts have sought to quell inflation.
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“This is absolutely the end of TINA for the foreseeable future” said James Athey, investment director at Abrdn PLC in London. “With eight-per-cent inflation, not much is attractive on a real basis.”
This is absolutely the end of TINA for the foreseeable future
James Athey
Even Fed chair Jerome Powell didn’t see the turbulence that was coming from inflation. He expected price gains to decline to levels closer to the Fed’s longer-run goal of two per cent by the end of 2022. But now bond markets are flashing recession signals as the Fed’s aggressive rate hikes pose a risk to the economy’s growth.
“This time last year, the Fed were themselves still expecting (rates) to be floored near zero at this point,” Deutsche Bank strategist Jim Reid said.
In less than half a year, that needle now points to 3.5 per cent by 2022’s end.
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Bear with me Even with the sharp declines, however, market gurus are keeping faith stocks will make a recovery by the end of the year.
Oppenheimer Asset Management Inc.’s John Stoltzfus still sees the S&P 500 ending 2022 at 5,330 points, requiring a 45 per cent rally in the next six months. A handful of others, including JPMorgan and Credit Suisse Group AG, have targets that require the index to rally at least 30 per cent to be met. Wall Street strategists, on average, see the S&P 500 gaining 22 per cent from Friday’s level in the latest Bloomberg survey.
To be sure, it’s anyone’s guess on when Russia’s war in Ukraine will end or the supply chain bottle necks due to China’s stringent COVID-19 policies will ease, lifting price pressures in addition to the Fed’s policy tightening.
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Article content This means there is further weakness for risk assets in store over the summer months
Max Kettner
But for Max Kettner, chief multi-asset strategist at HSBC Global Research, equities haven’t fully priced in a recession relative to other asset classes.
“All in all, this means there is further weakness for risk assets in store over the summer months,” he said.
The benchmark S&P 500 fell 51 per cent from peak to trough between 2000 and 2002, and by 58 per cent during the period of the global financial crisis.
Likewise, Morgan Stanley’s Michael Wilson — one of the few bearish voices in December— said the market’s more than 20 per cent drop still doesn’t fully reflect the risks to corporate earnings.
Nowhere to hide From the look of it, all one can do is stash cash under the mattress with gold and U.S. Treasuries — arguably the safest financial assets in the world — also sinking.
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Article content Stocks and bonds together are on track for their worst quarter ever. Meanwhile, credit markets have also taken a battering.
So far this year, the worldwide pool of the safest corporate debt has shed more than US$900 billion, marking its worst first-half of a year on record, according to Bloomberg index data. Measures of corporate credit risk are also spiking, with default-swaps insuring the debt of Europe’s high-grade firms sitting at the highest since April 2020.
Perhaps no other asset class has seen as wild of swings in 2022 as cryptocurrencies, however.
Bankers predict lack of IPOs, share sales to persist until inflation, market volatility cools Rate hikes are needed to cool inflation so investors need to adjust to the times Five daily affirmations to get investors through this latest bear market Advertisement 7 This advertisement has not loaded yet, but your article continues below.
For all the calls for bitcoin to hit US$100,000 earlier this year and claims of it being an inflation hedge, the market for digital assets has been in a downward spiral.
Bitcoin has lost two-thirds of its value since it touched a high of nearly US$70,000 in November. Arguments the world’s largest cryptocurrency was akin to gold and an independent store of value have gone quiet. Meanwhile, the cryptocurrency ecosystem of miners, traders and exchanges has been under growing scrutiny amid layoffs, freezes on withdrawals and liquidity problems.
It’s still not easy to get anything right in this market. There have been big rallies and big drawdowns, painting a bleak picture. But HSBC’s Kettner said this year’s trigger has been obvious.
“Just like investors were obsessed with the idea of ‘transitory inflation’ last year, the obsession of 2022 so far has been ‘peak inflation,’” he said. Inflation hasn’t turned out to be transitory, nor has it peaked yet. As such, “the last few days have been brutal.”
Bloomberg.com
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