Displaying items by tag: bear market

The Fed is beginning to talk tapering and that has sent treasury yields spiking to 3-month highs (since before delta was spreading rapidly). The treasury yield spike has sent Growth stocks, such as in the technology sector, tumbling. Investors caught in the middle have flocked to value stocks, such as energy and financials. These stocks have cyclical reopening qualities and investors are singing the same reflationary trade song from back in May. However, growth doesn’t look quite as sluggish, and this might keep these stocks rolling a bit longer. Supply side factors in energy in particular will keep value strong beyond interest rates falling or inflation being more than transitory.

FINSUM: Value needs this middle zone of moderate inflation and moderate growth. If either fall off or pick up too much it could push investors back into growth or push the whole market down!

(New York)

Some of the biggest names on Wall Street have been calling for a correction recently. Morgan Stanley is chief among them. The bank’s chief equity strategist, Mike Wilson, says he thinks there will be a 10% correction in the near term. According to Wilson—who predicted the last two market sell-offs—we are in a mid-cycle transition phase of a market cycle, which is an environment where equities getting very choppy.

FINSUM: This makes a lot of sense, but feels a little too bearish for us. If earnings can hold up, and inflation continues to moderate, we don’t think a full correction will occur. Flat and/or choppy, fair, but not a full 10% fall from here.

(New York)

Bank of America put out a stern warning this week. A team of Bank of America equity strategists led by Ohsung Kwon says that the current market looks eerily like the one in the fourth quarter of 2018, when stocks fell 20%. The market is experiencing some concerns on near-term earnings as companies cut back forecasts. According to Kwon, “The nearest memory of early cycle companies' impact on the market is almost exactly three years ago when companies warned about tariffs and slowing macro conditions during 3Q18 earnings … Those warnings and a hawkish Fed resulted in a 20% decline in the S&P 500”.

FINSUM: 2018 came within a hair of a full bear market. That feels too bearish given the overall trajectory of growth. If Congress doesn’t get the debt ceiling raised, though, all bets are off.

(New York)

While most banks try to stay bullish on market, Bank of America just couldn’t help but get gloomy this week, very gloomy. The bank says that record high prices and placid volatility mean a big correction looms. They believe the market is underpricing the risk of a Fed policy change, and when that comes, it will hit like a hammer. They even gave a name to these bouts of volatility/correction: “fragility shocks”. According to the bank, “We believe the US equity market is underpricing the risks of a looming tapering cycle. After all, the equity market has feasted on record monetary support post-COVID, and the Fed's outlook remains impaired by the extreme uncertainty in the macro forecasts on which they base their decisions”.

FINSUM: This unfortunately makes quite good sense. However, the opposing force here is that the buy-the-dip mentality is strong right now, which could provide support in any short-term sell-off.

(New York)

Usually big Wall Street banks are pretty moderate in their outlooks, and they are mostly bullish in general. Well, Bank of America Merrill Lynch didn’t hold back this week when they said the S&P 500 was at risk of a 16.5% tumble in the near term. The bank said that it expects the S&P 500 to fall 20 to 30 bp for every basis point increase in the ten-year Treasury. The bank thinks yields will rise 55 bp by the end the year, implying an up to 16.5% tumble in stocks. The bank says valuations are overstretched by almost every metric.

FINSUM: The bank did point out three sectors it felt were safer, which are energy, communications services, and health care.