Markets could face another ‘bearish black hole’
Warnings are sounding in global financial markets, punctuated by a cascade of selling in everything from stocks and crude oil to metals like iron ore.
“There is a high probability that we go into another December scenario, which was a black hole for almost all asset classes except Treasuries and gold,” Daryl Jones, research director at Hedgeye, told CNN Business.
Recession jitters drove the S<><><><><><><><><><><><><> <><><><><><><><><><><><>&P 500/a down by 9% last December. It was the index’s worst December since the Great Depression./ppJones, whose firm turned bearish last October, said those kinds of market drops are scary because “you don’t know where the bottom is.”/ppThe latest bout of market turbulence erupted on August 1 after President Donald Trump shocked investors by a href=”https://www.cnn.com/2019/08/01/economy/new-china-tariffs-threat-trump/index.html” target=”_blank”escalating the trade war with China./a Investors fear that the United States’ latest tariffs on China, scheduled to go in effect on September 1, will worsen the ongoing slowdown in global growth./pp”We may well be at the most dangerous financial moment since the 2009 Financial Crisis,” former US Treasury Secretary Larry Summers, a Clinton appointee, a href=”https://twitter.com/LHSummers/status/1158520853606404098″ target=”_blank”said/a Monday on Twitter./ppRisk of ‘Lehman-like’ volatility /ppNomura strategist Masanari Takada echoed Summers’ comments, warning in a note the following day that the next spike in volatility “could be Lehman-like.”/ppTakada argued that the market’s a href=”https://www.cnn.com/2019/06/06/investing/stock-market-sentiment-fed-trade-war/index.html” target=”_blank”sudden swings between optimism and pessimism/a over the trade war resemble the mood swings last decade over how the a href=”https://money.cnn.com/2018/06/06/news/companies/angelo-mozilo-countrywide-2008/index.html” target=”_blank”subprime mortgage crisis/a would play out./pp”Even if US stock market sentiment were to start picking up,” Takada wrote, “it may well collapse again in late August or early September.”/ppThe S<><> <><><><><><><><><><><><><><><><><><><><><><><><> <><><><><><><><><><><><><><><><><><>P 500 has retreated about 4% since Trump announced those new tariffs, which for the first time will hit a broad swath of consumer goods. Morgan Stanley has warned US stocks will likely suffer a correction of 10% before the end of September./ppIron ore plunges 18%, gold soars above $1,500/ppThe market moves have been even more extreme in other corners of Wall Street./ppBrent crude, the global benchmark, officially entered a bear market this week, meaning it has declined more than 20% from recent highs. US oil prices, which a href=”https://www.cnn.com/2019/06/05/investing/oil-prices-bear-market/index.html” target=”_blank”succumbed to a bear market in June/a, lost another 5% on Wednesday./ppIron ore and copper, two economically sensitive metals, have also been under heavy pressure. Iron ore has dropped 18% since August 1, according to Goldman Sachs./ppa href=”http://www.cnn.com/2019/08/07/investing/savings-federal-reserve-rate-cuts/index.html” target=”_blank”Bond yields collapsed/a on Wednesday, with the 10-year Treasury rate briefly sinking below 1.6% for the first time since the fall of 2016. That marks a stunning decline compared with its yield of 3.2% last November./ppThe yield curve, a reliable recession indicator in the past, has inverted to levels unseen since 2007./ppThe yield curve measures the gap between short-term and long-term rates. During normal times, longer maturing bonds pay out higher yields than their shorter duration peers. But that relationship has flipped upside down, alarming many investors./ppGold prices have topped $1,500 an ounce for the first time since 2013. Goldman Sachs predicted gold will hit $1,600 within six months./ppEven cryptocurrencies have enjoyed the flight to safety. Bitcoin briefly topped $12,000 on Wednesday./pp”That’s a sign that people are very anxious,” Summers, speaking of the broad flight to safety, told Bloomberg on Tuesday. “There is a growing risk that this trade conflict between the United States and China will broaden and get out of control.”/ppRecession risk on the rise/ppAlthough investors are clearly growing worried about a recession, that doesn’t necessarily mean the economic expansion is over./ppUS households are still spending and corporate America remains profitable, even if earnings are shrinking./pp”We do not envision an US recession during the next 12 months,” Evan Brown, head of macro asset allocation strategy at UBS Asset Management, wrote in a note to clients on Wednesday./ppHedgeye’s Jones agrees, predicting a “slow patch” for the US economy rather than a full-blown recession./ppThat doesn’t mean the stock market is in the clear, however, especially given the recent surge to record highs that left stocks looking expensive./pp”You don’t need a recession for the stock market to be down 20% to 25%,” Jones said. “Anywhere you look, valuations look extended.”/ppA 20% decline would mark the end of the bull market, which began in March 2009 and last summer became the a href=”https://money.cnn.com/2018/08/22/investing/bull-market-longest-stocks/index.html” target=”_blank”longest in American history. /a/ppLately, stocks have become more expensive based on common valuation metrics. For instance, last week the S<><><><><><><>P 500 traded at 16.8 times expected earnings, according to FactSet. That’s well above the 10-year average of 14.8./ppOne big wild card is the Federal Reserve, which could help restore confidence among investors by heeding Trump’s call for more easy money./ppJones said his firm’s call for a “bearish black hole” depends on whether the Fed comes to the rescue by voicing support for even larger rate cuts than Wall Street is pricing in./pp”That’s what saved us in December,” Jones said./p