LONDON – Investors looking for value in the stock market during the ongoing recession may be “fooling themselves,” according to Sean Corrigan, director of Cantillon Consulting.
Fears that central banks will have to hike interest rates aggressively to rein in inflation, at the risk of stifling growth as the world economy suffers from the simultaneous impacts of the war in Ukraine and other supply shocks, have led to a wide sale 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 almost 12% year-to-date and the MSCI Asia ex- Japan has lost 18.62% since then. the change of year.
Technology and growth stocks, which are the most vulnerable to sharp increases in interest rates, have 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 plunge in March 2020 to all-time 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 faith in the uptrend could be misplaced given the macro situation.
In a note on Friday, he suggested that since a substantial portion of growth stock holders that had performed so well until this year were using borrowed capital, others could be “swept away when the tide finally begins to turn.”
“People always say the market goes down by taking profits, it goes down by taking losses. The guy who sells at the top sells to the next two guys, who realize it won’t hold, who sell to the following guys and if 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 could be something peripheral to the real market, there’s another old expression: you pick the flowers to water the weeds. You sell the other stuff 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 risk-off sentiment that has prevailed of late, the S&P 500 remains more than 16% above its pre-COVID-19 high in early 2020, and Corrigan argued that the world is not in one place. better than at that stage.
“Even the people who are desperately trying to convince themselves that somewhere here now there must be value just because the asking price is lower are possibly still kidding themselves,” he said.
Given the scarcity and rising costs of “essentials of life” such as energy and food, which are reducing household incomes around the world, Corrigan argued that the consumer’s focus has shifted from businesses whose shares enjoyed the post-Covid rally the most.
“We have problems with energy, we have problems with food, we have problems with all the basics of life. Is this a time where you’re worried about spending $2,000 to buy a bike to pedal at home? Well , clearly not, which is why Peloton has been crushed,” he said.
“But how many other kinds of companies like that are now somewhat superfluous to the basic problems of existence that we’ve faced for the first time, possibly in two generations?”
Peloton shares have plunged nearly 60% since the beginning of the year.
The arguments of the acronyms deteriorate
Other speculative assets, such as cryptocurrencies, have also tumbled as growth concerns replace inflation concerns as investors’ top fear, while bonds and the dollar, traditional safe havens, have fallen. recovered.
In a research note on Friday, Barclays’ European equity strategist Emmanuel Cau said the typical acronym-based arguments that keep investors in stocks, such as TINA (no alternative), BTD (buy the crash) and FOMO (fear of missing out)—were being challenged by the worsening growth policy trade-off.
Central bank policy and rhetoric have been a key driver of daily market action in recent months, as investors seek to assess the speed and severity with which lawmakers will tighten to curb runaway inflation.
Having adopted unprecedented loose monetary policy to support economies during the pandemic, central banks now face the daunting task of undoing that stimulus amid a new barrage of growth threats.
“Without a trigger to alleviate recession anxiety this may continue, but the panic button has yet to be hit. And while highly speculative assets have tanked, we see little evidence of retail (investors) giving up actions,” argued Cau.
Federal Reserve Chairman Jerome Powell acknowledged Thursday that the US central bank cannot guarantee a “soft landing” for the economy, in terms of containing inflation without triggering a recession.
However, Corrigan does not expect this faith in the bull market from retail investors to bear fruit.
“As for the idea that inflation (i.e. rising prices) will soon recede significantly, it still seems like a distant prospect, although every minor reduction will undoubtedly be seized on as a ‘buying opportunity,'” he said. in Friday’s note.
“The market could well become a meat grinder of desperate hopes.”