Strategist says stock market could become meat grinder of lost

Strategist says stock market could become ‘meat grinder of lost hope’ for dip buyers

LONDON — Investors looking for value in the stock market during the prolonged downturn could be “deceiving themselves,” according to Sean Corrigan, a director at Cantillon Consulting.

Fears that central banks will have to aggressively raise interest rates to curb inflation – at the risk of stifling growth as the global economy is hit simultaneously by the war in Ukraine and other supply shocks – have sold off broadly in recent months led to the global markets.

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

Technology and growth stocks, which are most vulnerable to sharp hikes in interest rates, have suffered particularly sharp declines, with the tech-heavy Nasdaq 100 down more than 29% from its record high last year.

The negative start to the year followed a rally that propelled global equities from the depths of the first coronavirus crash in March 2020 to record highs, with growth companies and tech titans taking the lead.

Some investors have chosen to view the recent weakness as a buying opportunity, but Corrigan suggested bullish confidence may be misplaced given macro conditions.

In a note on Friday, he hinted that while a significant portion of the holders of the growth stocks that had performed so well up to this year were using leverage, others “could be swept away when the tide finally begins to ebb.” .

“People always say that the market goes back to taking profits – it’s about taking losses. The guy who sells at the top sells to the next two guys who realize it’s not going to last, who sell to the next guys and if any of those are leveraged we’re in trouble,” he told Friday CNBC’s “Squawk Box Europe”.

“And when they’re losing a lot of money in a market, which might be a bit irrelevant, there’s another old expression – uprooting flowers to water the weeds. They’re selling the other thing to pay for your margin calls or to try to rebuild our finances so it can spread and we’re clearly in that phase right now.”

Despite the recent risk aversion, the S&P 500 remains more than 16% above its pre-Covid high in early 2020, and Corrigan has argued that the world is no better off than it is at this point.

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

With shortages and rising costs of “livelihoods” like energy and food depressing household incomes around the world, consumer focus has shifted away from the companies whose stocks have enjoyed the post-Covid rally the most.

“We have energy issues, we have food issues, we have issues with all the staples. Is this a time when you’re worried about shelling out $2,000 to buy a bike you can pedal away in the comfort of your own home? Well, definitely not why Peloton was knocked out,” he said.

“But how many other types of businesses like this are now somewhat redundant in the face of the fundamental problems of existence that we may have faced for the first time in two generations?”

Peloton shares are down nearly 60% year-to-date.

Acronym arguments deteriorate

Other speculative assets such as cryptocurrencies have also slumped as growth worries replaced inflation worries as investors’ top fear, while bonds and the dollar – traditional safe havens – have rallied.

In a research note on Friday, Emmanuel Cau, Barclays’ head of European equity strategy, said the typical acronym-based arguments investors hold in equities – such as TINA (there is no alternative), BTD (buy the dip) and FOMO (fear , to miss something). ) – have been challenged by the deteriorating trade-off between growth policies and economic policies.

Central bank policies and rhetoric have been a key driver of daily market action over the past few months as investors seek to gauge the speed and severity with which policymakers will tighten to curb runaway inflation.

Having rolled out unprecedentedly easy monetary policy to support economies during the pandemic, central banks now face the difficult task of unwinding that stimulus amid a new spate of growth threats.

“Without a trigger to ease recession fears, this could continue, but the panic button has not yet been pressed. And while highly speculative assets have collapsed, we see little sign of retail (investors) abandoning equities,” argued Cau.

Federal Reserve Chair Jerome Powell conceded Thursday that the Federal Reserve cannot guarantee a “soft landing” for the economy to curb inflation without triggering a recession.

However, Corrigan doesn’t expect retail investor confidence in the bull market to bear fruit.

“As for the idea that inflation (ie price increases) will soon fall significantly, that still seems a distant prospect, although no doubt any small reduction will be used as a ‘buying opportunity,'” he said in Friday’s note.

“The market could well become a meat grinder of hopelessness.”