The sell-off in riskier corners of the market deepened as the UK’s plan to boost the economy fueled concerns that rising inflation could lead to tighter monetary policy, raising the odds of a recession.
It was a sea of red for the negotiating tables of Actions from around the world, with the loss in the S&P 500 pushing the indicator a surprising distance from its June bottom, which is less than 1% below current levels.
The lack of full-fledged capitulation may be a sign that the carnage is not over yet. Big firms like Goldman Sachs Group Inc. are slashing their targets for stocks, warning that a dramatic upward shift in the rate outlook will hit valuations.
As risk-off sentiment took hold, Treasuries reversed a slide that previously sent 10-year yields above 3.8%. The dollar hit a new record high, wiping out other currencies. The euro fell to its lowest level since 2002, while the pound touched its lowest level in 37 years. Traders are focusing on the widening gap between interest rates in the US and elsewhere.
“It looks like traders and investors are going to throw in the towel this week on what feels like a ‘sky is falling’ event,” said Kenny Polcari, chief strategist at SlateStone Wealth. “Once everyone stops saying ‘they think a recession is coming’ and accepts the fact that it’s already here, then the psyche will change.”
The strength of the US dollar has been relentless and it will exert a “significant drag” on corporate profits, serving as a key drag on stocks, said David Rosenberg, founder of his namesake research firm.
Investors flock to cash and shun almost all other asset classes as they grow more pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “hands down” the worst since the crisis 2008, with losses on government bonds the highest since 1920, strategists led by Michael Hartnett wrote in a note.
The gloomy sentiment is often seen as a contrarian indicator for the US stock market, in the belief that extreme pessimism may signal more promising times ahead. But history suggests capital losses may accelerate further from here before the current bear market ends, according to Ned Davis Research.
The company’s Crowd Sentiment Survey has been in a zone of extreme pessimism since April 11, or 112 consecutive business days marking the third-longest streak of pessimism since the data began in 1995. to those periods of extreme pessimistic sentiment, capital gains were fleeting, with negative average returns three and six months after the 100-day mark.
In another threat to stocks, different iterations of the so-called model of the fed , which compares bond yields to stock earnings yields, show that stocks are less attractive relative to corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is attracting the attention of investors, who can now look to other markets for similar or better returns.
The S&P 500’s breakdown from August highs solidifies the downtrend channel in place since the apex of the bull market in early January, according to Gina Martin Adams of Bloomberg Intelligence. “The breakdown below the 3,900 support leaves little for the index to cling to on its way to testing the June lows,” she wrote in a note.
As central banks around the world stepped up their fight against inflation at the cost of growth, oil was headed for its longest weekly losing streak this year. West Texas Intermediate fell below $80 a barrel for the first time since January and was headed for a fourth week of declines.