Wall Street’s worst sell-off since 2008 deepens on 98% recession bets

Wall Street’s worst sell-off since 2008 deepens on 98% recession bets

Wall Street risk-takers received a stark warning on Monday: stocks are still plunging and bearish sentiment is far from exhausted, especially with hawkish central bankers rattling recession-obsessed markets in this way.

The S&P 500 just dropped to its lowest level since December 2020, bringing this month’s losses to nearly 8%, as the pound fell to record lows and commodities buckled under the weight of a hulking dollar.

US Treasury yields continued to rise, with the 10-year rate increasing up to 21 basis points to 3.898%, its highest level since April 2010.

In the face of a concerted global increase in interest rates, monetary policymakers in Europe and the United States did nothing to help risk assets, which continue to reach new lows.

Ned Davis Research now sees a 98% chance of an impending global recession, and Lisa Shalett of Morgan Stanley Wealth Management warns earnings optimists that they are sleepwalking off a cliff.

As bad news from around the globe continues to mount, the equity market, which is already experiencing its worst performance since 2008, continues to be subjected to intense selling pressure.

“Unfortunately, this is just a process that must play out because the Fed will not stop, and the market must price in accordingly,” Stephanie Lang, chief investment officer at Homrich Berg, said over the phone.

There is still some downside due to the expectation that, if we are not already in a recession, we will soon be in one.

A gloomy day of trading in the United Kingdom dampened risk appetite globally, fueling fears that something is about to break in the financial markets, while central bankers in Europe and the United States touted their inflation-fighting credentials.

Wall Street’s worst sell-off since 2008 deepens on 98% recession bets

The S&P 500 fell for a fifth consecutive day, tech stocks were negatively affected, and the Russell 2000 index of smaller companies lost 1.4%.

Investors have been concerned about economic growth for months, but recent signs of weakness in the US industrial cycle and housing market have heightened their concerns.

Ned Davis Research’s global recession probability model recently surpassed 98%, triggering a “severe” recession signal. According to the firm’s Alejandra Grindal and Patrick Ayres, the model has only reached this level during previous severe economic downturns, such as in 2020 and 2008-2009.

They wrote in a note, “This indicates that the risk of a severe global recession is rising for some time in 2023, which would increase downside risk for global equities.”

Monday marked yet another session in which more than 400 S&P 500 stocks finished in the red. Nearly every industry posted losses, with real estate and energy falling by more than 2 percent each.

The benchmark index has now traded below its 200-day moving average for more than 110 days, one of the longest such stretches since 2008.

On Friday, investors purchased puts at a record rate, a phenomenon that has preceded previous market bottoms, while a multitude of stocks continues to trade below their short-term moving averages.

Fear continues to outweigh greed, discouraging dip buyers who believe the market has already bottomed, as sentiment and positioning reach levels that are difficult to sustain.

Dennis DeBusschere, the founder of 22V Research, stated, “The moves are so intense that everyone is anticipating a collapse.” “An extremely negative market or economic outcome.”

Investors have spent the majority of 2022 attempting to avoid a profit recession, which is becoming increasingly difficult.

According to Shalett, CIO of Morgan Stanley Wealth Management, signs of an economic slowdown, including in the housing market, indicate that they could “face a day of reckoning” once they realize that Federal Reserve policy operates with a lag.

The issue is that equity investors are typically only adept at translating economic data into earnings forecasts six months in advance, which means that any current earnings tailwinds may foster a “false sense of security.” However, the policy is implemented with longer delays, sometimes as many as two years.

“This bear market is not over, and investors should anticipate more negative surprises if they continue to underestimate the impact of rapidly rising interest rates,” she wrote in a note, adding that investors should sell a fourth-quarter bear-market rally.

Meanwhile, a strong dollar presents difficulties for global manufacturers. At one point on Monday, the dollar strengthened against every major currency, reviving fears of a “doom loop.”

Mike Bailey, director of research at FBB Capital Partners, stated, “We’re in the midst of a veritable arms race, with central bankers raising interest rates and employers retaining employees.” This scenario could result in relatively high-interest rates through next spring, which would be detrimental to bonds and high-growth stocks.