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Wall St Week Ahead Investors Wonder When the Vicious Selling of US Stocks Will End

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A specialist trader works on the floor of the New York Stock Exchange (NYSE) in New York City, US, Sept. 22, 2022. REUTERS/Brendan McDermid

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NEW YORK, Sept. 23 (Reuters) – A week of heavy selling has rocked US stocks and bonds, and many investors are bracing for more pain in the future.

Wall Street banks are adjusting their forecasts to account for a Federal Reserve that: shows no evidence of letting go, suggesting more tightening in the future to fight inflation after another market-shattering rate hike this week.

The S&P 500 is down more than 22% this year. On Friday, it briefly dipped below the mid-June low of 3,666, wiping out a sharp summer recovery in US equities before offsetting losses and closing above that level.

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With the Fed’s intent to raise interest rates higher than expected, “the market is currently going through a crisis of confidence,” said Sam Stovall, chief investment strategist at CFRA Research.

If the S&P 500 closes below its mid-June low in the coming days, it could spark another wave of aggressive selling, Stovall said. This could take the index as low as 3,200, a level in line with the average historic decline in bear markets that coincide with recessions.

While recent data has shown that the US economy is relatively strong, investors are concerned about the Fed tightening will cause a downturn. read more

timeline of the market

A disturbance in the bond markets put additional pressure on equities. The return on the 10-year Treasury benchmark, which is inversely proportional to prices, was recently around 3.69%, the highest level since 2010.

Higher yields on government bonds can weaken the attractiveness of equities. Technology stocks are particularly sensitive to rising yields because their value relies heavily on future earnings, which are discounted more deeply when bond yields rise.

Michael Hartnett, chief investment strategist at BofA Global Research, believes high inflation is likely to push US Treasury yields up to 5% over the next five months, exacerbating sell-offs in both stocks and bonds.

“We say new highs in returns equal new lows in stocks,” he said, estimating that the S&P 500 will fall to 3020, after which investors should be “popping” with stocks.

Goldman Sachs, meanwhile, lowered its year-end target for the S&P 500 by 16% from 4,300 points to 3,600 points.

“Based on our client conversations, a majority of equity investors believe a hard landing is inevitable,” Goldman analyst David Kostin wrote. read more

Investors are looking for signs of a capitulation point that would indicate a bottom is near.

The Cboe volatility index, known as the Wall Street fear meter, shot above 30 on Friday, its highest since late June but below the average level of 37 that has seen spikes in sales in past market declines since 1990.

Bond funds registered outflow from $6.9 billion in the week to Wednesday, as $7.8 billion was removed from equity funds and investors plowed $30.3 billion in cash, BofA said in a research note citing EPFR data. Investor sentiment is the worst since the 2008 global financial crash, the bank said.

Kevin Gordon, senior investment research manager at Charles Schwab, believes more backlogs lie ahead as central banks tighten monetary policy in a global economy that already appears to be weakening.

“It will take us longer to get out of this rut, not only because of the slowdown around the world, but also because the Fed and other central banks are catching up,” Gordon said. “It’s a toxic mix for risky assets.”

Still, some on Wall Street say the declines are exaggerated.

“Selling is going to be random,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services. “The increased chance of breaking June’s S&P 500 price may be what it takes to stir even deeper fear. Fear often leads to near-term bottoms.”

An important signal to watch for in the coming weeks is how sharply corporate earnings estimates are falling, said Jake Jolly, senior investment strategist at BNY Mellon. The S&P 500 is currently trading at about 17 times expected earnings, well above the historical average, suggesting a recession has not yet been priced into the market, he said.

A recession would likely force the S&P 500 to trade between 3,000 and 3,500 by 2023, Jolly said.

“The only way we see earnings not shrinking is if the economy can avoid a recession and right now that doesn’t seem like the favorite,” he said. “It’s very difficult to be optimistic about equities until the Fed achieves a soft landing.”

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Reporting by David Randall; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili, Nick Zieminski and David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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