STREET DOGS

From MarketWatch.com: Prepare for the biggest stock market sell-off in months, warns Morgan Stanley.

The US stock market has been partying all throughout July, and a hangover is coming. Wall Street’s rally is showing signs of “exhaustion”, and with the major positive catalysts for trading now in the rear-view mirror, there’s little that could continue to propel equities higher.

“Investors [are] finally faced with the proverbial question of ‘what do I have to look forward to now?’ The bottom line for us is that we think the selling has just begun and this correction will be the biggest since the one we experienced in February,” the investment bank wrote to clients.

“The decline could very well have a greater negative impact on the average portfolio if it’s centred on tech, consumer discretionary and small caps, as we expect…. While it is possible tech and consumer discretionary stocks won’t experience the derating witnessed in other cyclical sectors, we think it is unlikely.”

“Measured from their highs of early 2018, we estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq 100 index, -68% for the Russell 2000 index and nearly -69% for the Dow Jones industrial average,” says John Hussman of Hussman Investment Trust.

Known as a Permabear for his oft-repeated mantra of “overbought, overvalued, overbullish”, Hussman says he’s now learned from past errors. And while he admits the numbers “seem extreme”, he says they are backed up by what he refers to as the Iron Law of Valuation: it’s precisely when past investment returns look most glorious that future investment returns are likely to be most dismal, and vice versa.