Wall Street investment banks recommend against buying stocks

Written by ebookingservices

There is an avalanche of pessimism in wall street. Investment banks in the US are becoming more cautious in the face of the adverse scenario for stocks and investors’ negative macroeconomic projections.

The investment banks acknowledge that the negativism in the market is extreme. They also cut their estimates for the S&P 500 while recommending increasing liquidity positioning to reduce volatility in portfolios.

avalanche of bears

Stocks are experiencing their worst year since 2008. The rising rate environment as the Federal Reserve (Fed) is raising its reference rates to lower inflation causing volatility in the bond and stock market.

As the Fed seeks to cool down the economy, recessionary risks are growing, and that is why investors remain even more pessimistic about the future.

Both investment bank Goldman Sachs and BlackRock have recommended underweighting equity exposure as recession risk mounts.

In both cases, they consider that the adjustment in the market has not stopped at these levels and they expect further losses in prices going forward.

Analysts at these firms have turned more bearish, warning that markets have yet to price in the risks of a global recession.

Financial volatility

From Goldman Sachs they recommend reducing exposure to shares for the next three months, while recommending an overweight of cash within the portfolios.

“Current levels of stock valuations may not fully reflect current risks and may need to decline further to reach a market bottom,” Goldman strategists wrote in a note.

Goldman’s bearish recommendation comes after its analysts cut their year-end target for the S&P 500 index to 3,600 points from 4,300 last week.

Taking a similar view, investment bank BlackRock is advising investors to “refuse to buy most stocks,” adding that it is tactically underweight developed-market stocks.

“We do not see a ‘soft landing,’ in which inflation quickly returns to the Fed’s target without hitting the level of activity. That means more volatility and pressure on risk assets,” BlackRock strategists wrote in a note.

Another major player turning negative as volatility continues to rise was JPMorgan which also recommended underweighting portfolios in equities heading into the fourth quarter.

Recessive Risks

Wall Street has been trading lower recently on fears of an eventual US recession.

The Fed raises the rate to seek to cool down the economy and therefore the chances of seeing a recession grow.

This is also perceived in the market with an inversion in the American curve, that is, that the short sections are located at higher levels compared to the longer sections.

Every time this happens, the chances of seeing a recession grow.

If the rate differential between the 2-year and 10-year yields in the American curve is taken, it can be seen that it operates with its highest investment grade since the 1980s, when Paul Volcker was the president of the Federal Reserve and in which the monetary entity was also fighting against inflation.

According to analysts at Schroders, there is a 60% chance that the US economy is headed for a recession, the highest since 2006.

Tina Fong, a strategist at Schroders, warned that of the six monetary indicators it tracks, five are signaling downside risks.

“The Fed has responded to higher inflation with higher interest rates. The speed of the response this time which has caused almost all (over 80%) of the monetary indicators to turn red in a very short time. Except “The Great Recession of 2008 to 2009, this is the highest reading in three decades. Monetary indicators tend to point towards a recession five to 13 months ahead,” he warned.

Analysts at Criteria warned that the fight against inflation continues, and the Fed is expected to maintain its contractionary monetary policy to deepen the slowdown in prices.

“To a large extent, the risk of a high rate scheme is already largely built into asset prices as the S&P 500 accumulates a negative 19.6% return so far in 2022. However, The market seems to be starting to rotate around a new concern, which is the risk of an economic recession in the US and a slowdown in global activity that is already becoming more evident,” they said.

Analysts at investment bank Bank of America said investors are flocking to cash and avoiding almost all other asset classes.

This comes as investors turn to the highest level of pessimism since the 2007 global financial crisis.

Global portfolios chose to increase their liquidity in the last week by more than $US30 billion in the last week.

In contrast, exposures to global equities were reduced, with funds seeing outflows of $US7.8 trillion, as did bonds ($US6.9 trillion outflows), and gold by some $400 million.

“Investor sentiment is arguably the worst since the 2008 crisis, and government bond losses are the highest since 1920,” Bofa strategists wrote in the note.


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