Signs for a Stock Exchange cycle change markets

At first there was the ghost of stagnation, the undesirable scenario of soaring prices without economic growth, and now there is the open risk of a global economic downturn. At the very least, that’s how the financial markets perceive it, which has responded with a sharp wave of sales over the past few days to the current difficult economic situation: some central banks, and the Fed are at the forefront , going on the accelerator in raising interest rates. combating inflation – even at risk of sacrificing growth–; a war in Ukraine that promises to keep raw materials expensive and where the escalation of war is a growing threat with each passing day and China’s second world economic power, which will grow this year at the slowest rate in history recently. , determined to resort to childbirth to expel Covid-19.

All of these difficulties have resulted in the cut in economic growth forecasts for this year and the fear that the cuts will also affect corporate profits, which have now withstood an environment of maximum uncertainty in the first quarter, with their includes the initial impact on. outbreak of war in Europe. Investors therefore have plenty of reasons for being overwhelmed by pessimism, and the indicator on which revolves all fears, inflation, continues unabated.

The market has responded to the rate hikes already set to cope with price rises and those to come, expecting an even worse scenario than the current one. The big question now is where the bottom of the market has fallen in a row this year, but whether a return will be possible. In short, if a bearish stock market cycle begins, with an economic recession at the gates.

Currently, some alarms are triggered, not obvious. This week ‘s spike in crypto assets is already a clear signal of how investors, including the most naughty ones, are reducing risks in the face of rising rates. On Wall Street, the S&P has already reduced six consecutive weeks, a negative mark not seen in the last decade. There is a lot of nervousness, though not a selling panic, and the most prevalent tactic is to take a more defensive stance, given that investors have not decided to hit the buy button either. Emmanuel Cau, leader of European equity strategy at Barclays, expects the stock market to continue to decline.

The full capitalization, which is not yet for sale, has not yet happened

“Without a trigger to alleviate the fears of the recession (like a more servile Fed, China stepping down from its Covid-zero policy, or easing stress in Ukraine), investors will continue to sell equities. We see little potential until our price targets are at the end of the year, we do not see stock markets returning to the latest highs, ”he says. And he admits that while the market sentiment is very honest, capitalization has not happened, the total cessation of expected profits that installs bearish cycles.

Hedge funds were the ones that rushed to reduce risk, according to Cau. While other market players are not in bearish mode and may cause cascading sales. “It is the lack of investment options that has kept funds and individuals from investing heavily in the stock market. And if the fear of recession outweighs the fear of inflation, it is likely that more will be sold through mutual funds and individuals, ”he says.

Pessimism gan capitulation

Pablo Gil, a market strategist at XTB, sees many arguments in the wake of the recession, making it inevitable in his opinion whether central banks – with rate hikes that stop reversing growth – act or not – with runaway prices that will the basis of consumption. “A further 35% correction can be made in Europe and the US. Central banks have been making money out of thin air for years and now monetary normalization is beginning. The restriction has already begun even without raising rates. While there is no huge outflow in the ETFs, we are still far from capitalizing investors, ”he explains. In short, still far from the panic moment where no one pays attention to a cause and its sales reach all over the market, without discrimination.

There is no surrender, but the growing risk, which remains of uncertain scope, is increasing as do the variables to which investor sentiment is now subject: war and rising prices. not identifiable. As they warn Bank of America in a report published this Thursday, “love is broken.” Its strategist Michael Hartnett points out that the sale exodus has begun on Wall Street even though there is no “true capitulation”, despite the week seeing withdrawals of funds in all types of assets. It is one of the largest redemptions in investment grade, high yield and emerging debt from April 2020; the one with the highest sales in the emerging stock market since June of that year and the one with the largest outflows in technology stocks so far this year. Also the first of raw material sales.

According to Hartnett, the market does not have many signs that it is approaching the bearish abyss, although it does not believe that the bottom has yet been reached. In fact, for every 100 dollars invested in the Stock Exchange, four have been amortized, but for every 100 invested in corporate debt since April 2020, there have been 25 amortized. credit than in equities. The risk appetite will return to debt sooner than the Stock Exchange ”, he says.

At BlackRock they insist on overburdening the Stock Exchange and denying the beginning of the last cycle

At BlackRock in the last few days they have already decided to upgrade Europe’s sovereign debt and investment – grade credit from being overweight to neutral. “We maintain our overweight in developed market equity, although we have reduced portfolio risk slightly over the last few days due to the deteriorating economic situation. We continue to be constructive in the long run, our work plan has not changed, we do not see the beginning of a bearish stock market cycle “, explains Javier García-Díaz, Iberia’s sales leader and US manager, the one with the most assets under world management.

In fact, BlackRock has seized the opportunity to enter technology companies, “specifically in sectors related to artificial intelligence, cloud computing or the metaverse. We also see opportunities in raw materials, in the health sector and in banking, to be highly selective ”, says García-Díaz.

Most of the indices are in bearish territory, although the change in the cycle requires longer declines

Tomás Pintó, international equity leader at Bestinver, acknowledges that “a huge dichotomy has been created between the value and price of companies. The market has slowed in sectors such as the automotive industry or services, which are taking a toll on the economic downturn ”. And he insists on staying in the market and taking advantage of opportunities – with jobs in companies like Holcim, Heidelberg, BMW or Stellantis – just when market times are very uncomfortable.

From BBVA, Joaquín García Huerga, the manager’s global strategy director, said that stabilizing the market and stock markets is essential to recovering from previous levels, and seeing the peak of inflation and estimates of interest rate increases. “It is something that should be produced and therefore we understand that the lost year is not inevitable,” he says. And he defends that economic growth forecasts remain “more than acceptable”, at 3% in the US and 2.4% in the euro area.

bear markets

The major European indices and the Nasdaq remain in the bear market, having fallen more than 20% since their most recent highs. And the S&P is about to fall into that category, although, as Pablo Gil put it, “there is a bear market not only for what it goes down, but also for how far it goes down.”

As Axel Botte, a global strategist at Ostrum AM (of Natixis IM group), explains, “too long monetary policy and a credit crunch could lead to a long bear market.” But he says that “at the moment, there are no signs of a decline in business credit. There is no alarm signal on the level of business confidence and, above all, the health of the company’s balance sheets. There is always the potential for increased dividend payments and significant repurchases. ” While he warns that there could be a higher number of profit warnings in the second half.

Exaggerated or not, investors have no reason to be negative in the short term and this month’s letter is fulfilling the popular stock market statement for sell – in and out. The big unknown remains to be resolved is whether unprecedented price rises since the 1970s will provide a breathtaking space to return to the market in search of profitability.