LONDON — According to Sean Corrigan, director of Cantillon Consulting, investors looking for value in the stock market during the ongoing recession are “deluding themselves.”
Fears that central banks will be forced to raise interest rates aggressively to curb inflation – at the risk of stifling growth as the global economy simultaneously takes the blows of war in Ukraine and other supply shocks – have led to a wide sell-off in global markets in recent months.
The S&P 500 closed Thursday’s session down 18% from its all-time high, approaching bear market territory, while the pan-European Stoxx 600 is down nearly 12% since the start of the month. year and that the MSCI Asia ex-Japan has since lost 18.62%. the turn of the year.
Tech and growth stocks, which are the most vulnerable to sharp increases in interest rates, suffered particularly steep declines, with the tech-heavy Nasdaq 100 down more than 29% from its all-time high. last year.
The negative start to the year followed a rally that had 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 way.
Some investors have chosen to view the recent weakness as a buying opportunity, but Corrigan suggested that confidence in the bull run may be misplaced given the macro picture.
In a note on Friday, he suggested that since a significant portion of the growth stock holders who had performed so well until this year were using borrowed capital, others could be “swept away when the tide begins. finally to flow back”.
“People always say the market is all about taking profits – it depends on realizing losses. The guy who sells at the top sells to the next two guys, who realizes it’s not going to hold, who sells to the next guys and if any of those are exploited, we have issues,” he told CNBC’s “Squawk Box Europe” on Friday.
“And if they lose a lot of money in a market, which might be somewhat peripheral to the real market, there’s another old expression – pull the flowers to water the weeds. You sell the other thing to pay your margin calls or trying to rebuild our finances, so it can spread, and we’re clearly in that phase right now.”
Despite the risk sentiment that has prevailed lately, the S&P 500 remains more than 16% above its pre-Covid high at the start of 2020, and Corrigan argued that the world is not in a better place. place than it was at this point.
“Even people who are desperately trying to convince themselves that somewhere here there must now be value just because the asking price is lower, may still be under the illusions,” he said.
With shortages and soaring costs of “life’s basics” such as energy and food squeezing household incomes around the world, Corrigan said consumer attention moved from companies whose stocks appreciated the most in the post-Covid rally.
“We have energy issues, we have food issues, we have issues with all the basics of life. Is this a time when you’re worried about spending $2,000 to buy a bike to pedal at your house? Well, clearly not, that’s why Peloton was run over,” he said.
“But how many other types of undertakings like this are now somewhat superfluous to the fundamental problems of existence that we have faced for the first time in perhaps two generations?”
Platoon shares have plunged nearly 60% since the start of the year.
Acronym Arguments Deteriorate
Other speculative assets, such as cryptocurrencies, also slumped, with growth concerns overriding inflation concerns as investors’ primary fear, while bonds and the dollar – traditional safe havens – recovered.
In a research note on Friday, Barclays head of European equity strategy Emmanuel Cau said typical acronym-based arguments that keep investors in stocks – such as TINA (there is no ‘alternative), BTD (buy the dip) and FOMO (fear of missing out) — were challenged by worsening growth-policy trade-offs.
Central bank policy and rhetoric have been a key driver of daily market action in recent months as investors seek to gauge the speed and severity at which policymakers will toughen up in order to rein in runaway inflation.
Having adopted an unprecedentedly loose monetary policy to support economies during the pandemic, central banks now face the difficult task of unwinding this stimulus amid a new barrage of threats to growth.
“Without a trigger to ease recession-related anxiety, it could continue, but the panic button has yet to be hit. And while highly speculative assets have crashed, we see little evidence that individuals ( investors) are abandoning equities,” Cau explained.
Federal Reserve Chairman Jerome Powell admitted on Thursday that the US central bank could not guarantee a “soft landing” for the economy in terms of controlling inflation without triggering a recession.
Corrigan doesn’t expect that confidence in the bull market from retail investors to pay off, however.
“As for the idea that inflation (i.e. rising prices) will soon come down significantly, that still seems a distant prospect, though no doubt every minor reduction will be seized upon as a ‘buying opportunity’,” he said in Friday’s note.
“The market may well become a meat grinder of vain hope.”