The third quarter is a officially a wrap, and the stock market saw the Dow (^DJI) post its worst September performance in two decades — down nearly 2800 points, or 8.9% for the month — while the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) are now in the red three straight quarters for the first time since the Global Financial Crisis.
And as investors prepare for the historically volatile (and crash-prone) month of October, some on Wall Street are coalescing around the idea that equities are on the cusp of a meaningful rally. Two key questions remain: How far can stocks rally? And, is “The low” in?
The global research team at BofA Securities, led by Michael Hartnett, has navigated the curveballs thrown by 2022 far better than most. In their latest missive, Hartnett & Co. reflect on the “broken, freaky post-[Quantitative Easing] financial system plumbing” and throw down the gauntlet at the bottom-is-in crowd.
“We are tactical bears,” says BofA, recommending bets on lower stock prices and higher yields (particularly in the two-year tenor) into Halloween.
This image of U.S. dollars flowing through pipes was created by Yahoo Finance with DALL·E AI software. (OpenAI)
They cite the recent actions by the Bank of Japan and Bank of England as evidence that central bankers are enacting ad hoc policy responses doomed to fail. Moves in London were particularly dizzying: British authorities aggressively hiked rates to combat inflation (restrictive), then proposed cutting taxes to mitigate the pain on the working class (stimulative), and then — in the face of pension funds teetering on the brink of collapse — committed to buy an unlimited amount of bonds for a period (also stimulative).
The situation may not be as dire in the U.S., but cracks are surfacing that reveal financial markets are creaking under the strains of massive and often incongruous policy responses.
Central banks have tightened financial conditions to the point where the plumbing of the global financial markets could burst, BofA stated, having already drained $3.1 trillion from their balance sheets through quantitative tightening (QT).
Investors, meanwhile, are grappling with a generational shakeup in market regime, which necessarily takes time and patience to navigate. BofA painted a stark picture of the dramatic transition.
The “bullish deflationary era of peace, globalization, fiscal discipline, QE, zero rates, low taxes, [and] inequality” is slowly giving way to an “inflationary era of war, nationalism, fiscal panic, QT, high rates, high taxes, [and] inclusion,” the analysts wrote.
At the same time, authorities must respond to day-to-day realities — oftentimes without the luxury of waiting. BofA believes that global authorities are likely to come together and coordinate policy if the carnage continues into a critical G20 meeting in mid-November.
Until then, BofA sees the S&P 500 plunging further to the numerically-symmetrical target of 3333. Rounding to the nearest hundred, their advice is to “nibble 3600, bite 3300, gorge 3000.” The S&P 500 closed at 3585.62 Friday — a fresh 2022 low — suggesting a light snack of bruised large-cap stocks for those champing at the bit to deploy cash on the sidelines.
Looking forward to 2023, BofA expects the “Big Low” in the first quarter as recession and credit shocks peak. From there, the bank is forecasting the “trade of ’23” to be short the dollar while being long emerging markets, small caps, and cyclical stocks.
BofA stressed that investors shouldn’t expect to achieve anything near the historic annual returns of 10% — much less the 14% returns achieved over the trailing decade — and simply be aware of “more limited upside from risk assets.”
After what is shaping up to be a remarkably turbulent year for investors, perhaps “limited upside” will be a welcome change in 2023.
Investors are betting that soaring U.S. interest rates, bond yields and the dollar will tighten financial conditions enough to tip the U.S. and global economies into recession. A few domestic crises and central bank interventions – think Britain and Japan – have only darkened the global gloom. On Friday, JP Morgan’s Marko Kolanovic – one of the most vocal equity bulls – appeared to throw in the towel, saying he now fears a central bank policy error.
Peloton went from boom to bust seemingly overnight, and as buyout rumors swirl, one analyst is skeptical the beleaguered home fitness company could sell even if it wanted to.
-Tesla Inc on Sunday announced lower-than-expected electric vehicle deliveries in the third quarter, as logistical challenges overshadowed its record deliveries. The top electric car maker said “it is becoming increasingly challenging to secure vehicle transportation capacity and at a reasonable cost,” but some analysts were also concerned about demand for high-ticket items due to the weakening global economy. Ford Motor said last month inflation-related costs would be $1 billion more than expected in the third quarter and that parts shortages had delayed deliveries.
(Bloomberg) — The relentless plunge in China’s stocks has burnished the appeal of their biggest emerging-market rival India, spurring a divergence that’s rarely been seen before. Most Read from BloombergCredit Suisse CEO Seeks to Calm as Default Swaps Near 2009 LevelGazprom Halts Gas Supplies to Italy in Latest Energy BattleGet Ready for Another Bear-Market Rally, Strategist Emanuel SaysOPEC+ to Consider Output Cut of More Than 1 Million BarrelsIndonesia Soccer Stampede Kills 131 as Use of Tear
Greece wants to have a constructive dialogue with Turkey based on international law but its Aegean neighbour must halt its unprecedented escalation of provocations, the Greek foreign minister said on Sunday. The two countries – North Atlantic Treaty Organization (NATO) allies but historic foes – have been at odds for decades over a range of issues, including where their continental shelves start and end, overflights in the Aegean Sea and divided Cyprus. “It is up to Turkey to choose if it will come to such a dialogue or not, but the basic ingredient must be a de-escalation,” Nikos Dendias told Proto Thema newspaper in an interview.
The stock market desperately wants to put in a low. The Federal Reserve won’t let it. On the one hand, U.S. economic data remains strong, as jobless claims fell below 200,000 for the first time since May, a sign that the Fed will have to keep raising interest rates to slow down inflation.
The stock market is often a game in reverse psychology. That is, when the mood gets too euphoric, it’s often a sign it is time to sell. Likewise, when sentiment hits the skids, that could be the ultimate signal the time is right to load up the truck. And on that subject, J.P. Morgan’s Marko Kolanovic thinks we are at – or at least near – the bottom. The firm’s global market strategist believes the Fed’s hawkish stance has left stocks “very oversold,” and while inflation remains persistently high
Using technical analysis of the charts of those stocks, and, when appropriate, recent actions and grades from TheStreet’s Quant Ratings, we zero in on three names. While we will not be weighing in with fundamental analysis, we hope this piece will give investors interested in stocks on the way down a good starting point to do further homework on the names. MarineMax Inc. recently was downgraded to Hold with a C+ rating by TheStreet’s Quant Ratings.
(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.Most Read from BloombergCredit Suisse CEO Seeks to Calm as Default Swaps Near 2009 LevelGazprom Halts Gas Supplies to Italy in Latest Energy BattleGet Ready for Another Bear-Market Rally, Strategist Emanuel SaysOPEC+ to Consider Output Cut of More Than 1 Million BarrelsIndonesia Soccer Stampede Kills 131 as Use of Tear Gas QueriedThe world economy is showing signs of a rapid downshift a
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