Wall Street bears take revenge after rally
Price pressures likely to continue eroding margins
NEW YORK: A sober warning for Wall Street and beyond: The US Federal Reserve (Fed) is still on a collision course with the financial markets.
Stocks and bonds are set to tumble once more even though inflation has likely peaked, according to the latest Bloomberg MLIV Pulse survey, as rate hikes reawaken the great 2022 selloff.
Ahead of the Jackson Hole symposium later this week, 68% of respondents see the most destabilising era of price pressures in decades eroding corporate margins and sending equities lower.
A majority of the more than 900 contributors, who include strategists and day traders, reckon inflation has topped out.
Still, a whopping 84% say it may take two years or longer for the Jerome Powell-led central bank to bring it down to the official long-term target of 2%.
In the meantime, American consumers will cut spending, and unemployment will climb over 4%.
These bearish sentiments come amid deep scepticism in the face of an unexpected US$7 trillion (RM31.4 trillion) equity rebound of late.
While stocks fell last week, the S&P 500 has still trimmed its 2022 loss to 11% versus the 23% decline through its mid-june nadir.
“This is a bear-market trap,” said Victoria Greene, of G Squared Private Wealth.
“Inflation is the big, bad boogie man. Even if there really is a sustained decrease in inflation, it could take a while before prices actually come down significantly.”
The survey results spell trouble for dip buyers, who have re-emerged after the horrendous first half – driven by bets on a less-hawkish monetary tightening cycle .
In turn, shares around the world have clawed back some of the worst losses, while the 10-year treasury yield has fallen back to around 3% from the peak of near 3.5% earlier this year.
MLIV respondents, for their part, reckon bond prices are set to dip again over the next month, with Fed chairman Powell having an opportunity to renew hawkish market expectations at the gathering this week in Jackson Hole, Wyoming.
Fed funds futures currently show traders are betting the central bank will stop hiking after raising the benchmark to 3.7% and will start cutting as early as May 2023.
Yet even the doves are pushing back, with Minneapolis Fed president Neel Kashkari recommending a 4.4% rate by the end of 2023.
It’s hard to overstate why all this matters. The fast pace of monetary tightening and the resulting economic fallout is the biggest risk for money managers all over the world, with interest rates being a key driver of corporate valuations.
The bad news, per survey participants, is that inflation will deliver a meaningful blow to margins, pushing stocks lower.
While inflation’s effect on profit margins is very much an open question, the majority of MLIV readers appear closer to the bearish spectrum of a heated Wall Street debate on where stocks are headed.
Consumers are likely to buy fewer goods in the next six months, according to a majority of respondents, as long as high prices persist.
That’s in line with warnings from the world’s largest retailer, Walmart Inc, that soaring inflation is forcing shoppers to pay more for essentials at the expense of other discretionary items.
Consumer spending cuts would be a clear drag on profits reported by S&P 500 companies, which are also dealing with higher wages, rising inventories, and ongoing supply-chain issues in China.
While the S&P 500’s margins peaked a year ago, the trough may not come until the fourth quarter, according to Bloomberg Intelligence.
Since the start of the earnings season, consensus estimates for net-income margins have fallen by about a half percentage point for both the third and fourth quarters, with communication services, health care, and consumer sectors among the weakest, according to the data.
Pulse contributors also reckon unemployment is likely to rise above 4% but not higher than 6%, a worrisome level that’s higher than what policymakers are anticipating but lower than in previous severe economic downturns.
That offers some comfort that any recession would be short-lived, providing a dip-buying opportunity for risk assets.
“It’s rare for the Fed to aggressively tighten policy without causing market volatility,” said John Cunnison, chief investment officer at Baker Boyer Bank.
“Stocks aren’t wildly cheap right now, but they’re not as expensive as they were six months ago, especially for growth companies.”
“Even if there really is a sustained decrease in inflation, it could take a while before prices actually come down significantly.” Victoria Greene