Strategist says market could become ‘meat grinder of lost hope’

LONDON – Investors looking for value in the stock market during the ongoing recession may be “deluding themselves”, according to Sean Corrigan, managing director at Cantillon Consulting.

Fears that central banks will have to aggressively raise interest rates to contain inflation – with the risk of stifling growth as the global economy suffers simultaneous impacts from the Ukraine war and other supply shocks – have led to widespread selling. in global markets in recent months.

The S&P 500 ended Thursday’s session down 18% from an all-time high, approaching bear market territory, while the pan-European Stoxx 600 is down nearly 12% year-to-date and MSCI Asia ex-Japan has dropped 18.62% since the turn of the year.

Tech and growth stocks, which are more vulnerable to sharp rises in interest rates, have seen particularly sharp declines, with the tech-heavy Nasdaq 100 down more than 29% from last year’s record.

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

Some investors chose to view the recent weakness as a buying opportunity, but Corrigan suggested that faith in the bull run could be misplaced due to the macroeconomic condition.

In a note on Friday, he suggested that since a substantial portion of holders of growth stocks that have performed so well this year were using borrowed capital, others may be “swept out when the tide finally starts to turn.” “.

“People always say the market goes down with taking a profit – it goes down with taking a loss. The guy who sells at the top sells to the next two guys, who realize they’re not going to make it, who sell to the next guys and any of those are leveraged, we’re in trouble,” he told CNBC’s “Squawk Box Europe” on Friday.

“And if they’re losing a lot of money in a market, which might be a little peripheral to the real thing, there’s another old expression – plucking the flowers to water the weeds. You sell the other thing to pay your margin calls or try to rebuild our finances so it can spread, and we’re clearly at that stage right now.”

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

“Even people who are desperately trying to convince themselves that somewhere down here there must be value now just because the asking price is lower, are possibly still deluding themselves,” he said.

Given the scarcity and rising costs of “life’s basics” like energy and food, which are squeezing incomes from households around the world, Corrigan said the consumer focus has shifted away from the companies whose stocks took most advantage of the post-war rally. Covid.

“We have problems with energy, we have problems with food, we have problems with all the basics of life. Peloton was crushed,” he said.

“But how many other types of companies like this are now somewhat superfluous to the basic problems of existence that for the first time, possibly in two generations, we have been confronted with?”

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

Acronym arguments deteriorating

Other speculative assets such as cryptocurrencies also collapsed as growth concerns outweighed inflation concerns as investors’ top fear, while bonds and the dollar – traditional safe havens – rallied.

In a research note on Friday, Barclays’ head of European equity strategy, Emmanuel Cau, said the typical acronym-based arguments that keep investors in equities – such as TINA (no alternative), BTD (buy the dip) and FOMO (fear of missing out) — were being challenged by the worsening trade-off between growth policy.

Central bank policy and rhetoric has been a key driver of daily market action in recent months as investors look to gauge the speed and severity with which policymakers will tighten in order to curb runaway inflation. .

Having adopted unprecedented monetary policy to support economies during the pandemic, central banks now face the daunting task of undoing that stimulus amid a new barrage of threats to growth.

“Without a trigger to alleviate recession anxiety, this may continue, but the panic button has not yet been hit. And while highly speculative assets have collapsed, we see little evidence of retail (investors) giving up on equities,” he argued. Cau.

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

Corrigan doesn’t expect this bull market faith from retail investors to bear fruit, however.

“As for the idea that inflation (i.e. price increases) will soon recede significantly, that still seems like a distant prospect, although no doubt every small reduction will be taken as a ‘buying opportunity,'” he said in Friday note.

“The market can become a meat grinder of lost hope.”

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