(Bloomberg) -- The Dow has fallen four straight weeks, the VIX is near 32, recession signals are surfacing and war in Europe is dousing sentiment.
With trouble everywhere, getting a handle on who's doing what in the stock market is hard, but one overarching trend took shape this week as the S&P 500 slid in four of five days. Professional traders, while keeping a hand in for stock picking, took a broad step back, while individual investors kept the money flowing.
Evidence comes in a report by Goldman Sachs Group Inc.'s prime brokerage, which found that over three days, hedge-fund clients unwound risk at the fastest rate in three months in cumulative dollar terms. At the same time, flows tracked by JPMorgan Chase & Co. showed retail traders bought $4.1 billion in the week through Tuesday, with money sent to S&P 500-linked ETFs more than 2 standard deviations above the 12-month average.
Views on the market always diverge but are doing so now in a particularly violent way, with war, Federal Reserve hawkishness and uncertain economic prospects challenging conviction. UBS Group AG published a scenario analysis citing a machine-learning model that reckons the Russia/Ukraine conflict could send the S&P 500 anywhere from 3,800 to 4,800 -- a 26% range -- depending on how it resolves.
“The outlook remains very uncertain and more difficult to predict than even during the Covid crisis,” said Seema Shah, chief global strategist at Principal Global Investors. “Many investors are taking a long-term view of the market, particularly for the U.S. where economic implications of the conflict are expected to be relatively contained,” she said. “On the other hand, geopolitical risk is extremely high.”
Declines on Thursday and Friday erased the S&P 500's gains from the previous week, as Ukraine said Russian forces attacked a nuclear power plant, sparking a surge in oil prices and a rush for haven assets like gold. Volatility has been the only constant: since Jan. 31, the S&P 500 has posted 13 daily moves of at least 1% -- six up and seven down.
The Cboe Volatility Index, a gauge of option costs tied to the equity benchmark, has averaged almost 25 this year and closed the last five days above 30. At this rate, 2022 is shaping up as the second-wildest year in the past decade behind only the pandemic year of 2020.
Amid heightened macroeconomic uncertainty, trepidation is building among pros. Hedge funds, which cut their equity exposure to the lowest level in almost two years in February, kept trimming into the new month. On Wednesday, when the S&P 500 rallied almost 2%, clients tracked by Goldman Sachs cut long positions and covered shorts.
The caution was echoed in a poll by the National Association of Active Investment Managers, where an index of their stock exposure fell this week to levels last hit in the immediate aftermath of the pandemic bear market.
Pessimism is swirling as harrowing headlines emanate from the Ukraine war and odds grow that surging commodity prices will slow global growth at a time when the Fed is poised to hike interest rates this month. Haven assets like Treasury bonds were sought, while measures of funding stress spiked.
A study by Luca Paolini, chief strategist at Pictet Asset Management, showed that every 50% oil deviation above its long-term trend line, as is the case now, has led to an economic contraction since 1970.
Recessions are threats that stocks historically have never been able to weather.
“Every other market is consistent with the idea that the economy is in trouble and there's stress in the markets,” said Jim Bianco, president of Bianco Research LLC in Chicago. “The stock market historically does this -- it's the last market to turn, it's the slowest market to understand the problems. It's the market driven by narratives and hope.”
Count retail investors among the optimists. The crowd has purchased a net $36 billion of equities so far in 2022, the most at this point on the calendar in at least five years, JPMorgan data show.
For all the uncertainties, the bull case still has been hard to dismiss. Solid economic growth is expected throughout this year and next. So are earnings for corporate America. And while the raging war hurt investor appetite for European equities, at some level, it helped solidify the America First trade.
The average stock in the S&P 500 has seen its price-earnings ratio dropping slightly below the 10-year average. That, along with falling Treasury yields, pointed to favorable valuations for equities. Moreover, history shows the market impact from military events was often fleeting.
Larry Williams, 79, who has been trading since 1962, is optimistic.
“We're not in a recession. We will get over the Ukraine” war, said Williams, an independent trader who created a momentum indicator popular with technical analysts. “There's a cyclical low coming in the market about now. We'll be chopping until maybe September. And then we have a huge move to the upside. We're going to end up with a big bull market this year.”
| Read more |
|---|
| Market Has ‘January 2008 Type of Feel' to Sundial: Taking Stock |
| Company Insiders Sidestep Their Own Stocks Amid Market Spasms |
| Growth Angst Shakes Markets Already Obsessed With Inflation Risk |
David Spika, president and chief investment officer of GuideStone Capital Management, is less sanguine given all the lingering uncertainty around the Ukraine/Russia conflict.
UBS strategists led by Keith Parker ventured some possible scenarios on how the war could impact equities. Should tensions escalate and a recession follow, growing risk aversion would send the S&P 500 to 3,800, with stocks entering a bear market. By contrast, the index could rise to 4,800 at the end of the second quarter if tensions ease, their model shows.
“You've got basically a dictator attacking a sovereign country and killing innocent people -- we haven't seen this to this degree in a long, long time, so we don't really know how it ends,” said Spika at GuideStone. “The range of outcomes is very wide and that's the uncertainty.”
©2022 Bloomberg L.P.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
