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Investors wonder when vicious sell-off in U.S. stocks will end

Economy Sep 25, 2022 09:05AM ET
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By David Randall

NEW YORK (Reuters) - A week of heavy selling has rocked U.S. stocks and bonds, and many investors are bracing for more pain ahead.

Wall Street banks are adjusting their forecasts to account for a Federal Reserve that shows no evidence of letting up, signaling more tightening ahead to fight inflation after another market-bruising rate hike this week.

The S&P 500 is down more than 22% this year. On Friday, it briefly dipped below its mid-June closing low of 3,666, erasing a sharp summer rebound in U.S. stocks before paring losses and closing above that level.

With the Fed intent on raising rates higher than expected, "the market right now is going through a crisis of confidence," said Sam Stovall, chief investment strategist at CFRA Research.

If the S&P 500 closes below the mid-June low in the days ahead, that may prompt another wave of aggressive selling, Stovall said. This could send the index as low as 3,200, a level in line with the average historical decline in bear markets that coincide with recessions.

While recent data has shown a U.S. economy that is comparatively strong, investors worry the Fed's tightening will bring on a downturn.

A rout in bond markets added pressure on stocks. Yields on the benchmark 10-year Treasury, which move inversely to prices, recently stood at around 3.69%, their highest level since 2010.

Higher yields on government bonds can dull the allure of equities. Tech stocks are particularly sensitive to rising yields because their value rests heavily on future earnings, which are discounted more deeply when bond yields rise.

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation will likely push U.S. Treasury yields as high as 5% over the next five months, exacerbating the selloff in both stocks and bonds.

"We say new highs in yields equals new lows in stocks," he said, estimating that the S&P 500 will fall as low as 3,020, at which point investors should "gorge' on equities.

Goldman Sachs (NYSE:GS), meanwhile, cut its year-end target for the S&P 500 by 16% to 3,600 points from 4,300 points.

"Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable," wrote Goldman analyst David Kostin.

Investors are looking for signs of a capitulation point that would indicate a bottom is near.

The Cboe Volatility Index, known as Wall Street's fear gauge, on Friday shot above 30, its highest point since late June but below the 37 average level that has marked crescendos of selling in past market declines since 1990.

Bond funds recorded outflows of $6.9 billion during the week to Wednesday, while $7.8 billion was removed from equity funds and investors plowed $30.3 billion into cash, BofA said in a research note citing EPFR data. Investor sentiment is the worst it has been since the 2008 global financial crash, the bank said.

Kevin Gordon, senior investment research manager at Charles Schwab (NYSE:SCHW), believes there is more downside ahead because central banks are tightening monetary policy into a global economy that already appears to be weakening.

"It will take us longer to get out of this rut not only because of slowdown around the world but because the Fed and other central banks are hiking into the slowdown," Gordon said. "It's a toxic mix for risk assets."

Still, some on Wall Street say the declines may be overdone.

“Selling is becoming indiscriminate,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. "The increased probability of breaking the June S&P 500 price low may be what it takes to invoke even deeper fear. Fear often leads to short-term bottoms."

A key signal to watch over the coming weeks will be how steeply estimates of corporate earnings fall, said Jake Jolly, senior investment strategist at BNY Mellon (NYSE:BK). The S&P 500 is currently trading at around 17 times expected earnings, well above its historical average, which suggests that a recession is not yet been priced into the market, he said.

A recession would likely push the S&P 500 to trade between 3,000 and 3,500 in 2023, Jolly said.

"The only way we see earnings not contracting is if the economy is able to avoid a recession and right now that does not seem to the odds-on favorite," he said. "It's very difficult to be optimistic on equities until the Fed engineers a soft landing."

Investors wonder when vicious sell-off in U.S. stocks will end
 

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Comments (35)
ROB Stone
ROB Stone Sep 26, 2022 2:09AM ET
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once all the over leveraged hedge funds are margin called and get liquidated. Thry a few banks will have to fall... It is a cycle
Mohammad Abdullah
Mohammad Abdullah Sep 25, 2022 10:42AM ET
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Over done
A Khar Lay
A Khar Lay Sep 25, 2022 10:40AM ET
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Scott Armel
Scott Armel Sep 25, 2022 10:21AM ET
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reckoning day around the corner for those REITs that been snaking our homes
Brad Albright
Brad Albright Sep 25, 2022 10:10AM ET
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When Schiller PE reverts to it mean.
Casador Del Oso
Casador Del Oso Sep 25, 2022 10:10AM ET
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I love reading these comments! Such extremes indicate to me that the market turmoil is far from over.
Mo Lm
Mo Lm Sep 25, 2022 10:01AM ET
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When Powell is fired and Biden is in a nursing home. So not far to go.
EL LA
EL LA Sep 24, 2022 5:11PM ET
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People need to get rid of their pets. Pets and pets products are the 7th highest in inflation, up almost 12%.  When people finally get rid of their pets it will be a bottom. They need to switch to electric remote battery powered pets.
Dweeptaru Das
Dweeptaru Das Sep 24, 2022 5:11PM ET
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hahahahaha well said
Peter O Neill
Peter O Neill Sep 24, 2022 4:53PM ET
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My guess is we might get to a bottom in June 2023 after earning reports (but as they say if we all knew the answer we would all be millionaires). Can't see any companies not falling with QT, rising rates and no more cheap debt on tap. Could see the market back at precovid levels by then - Nasdaq around 8,000, Dow around 25,000 and S&P around 2,800 -3,000 ...but could see them even lower if anything kicks off in relation to the current fed debt ceiling not being lifted at the end of the year, the russian/ Ukraine war or China / Taiwan tensions
jason xx
jason xx Sep 24, 2022 2:41PM ET
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Average's mean nothing. I keep hearing about these earnings estimates falling but it only happens to bad companies. Earnings will be great after everyone lowered guidance last quarter and kitchen sinked it. Bears will be toasted again.
JIM VETTER
JIM VETTER Sep 24, 2022 2:41PM ET
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wanna bet?
 
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