One bad year in the stock market has turned Wall Street strategists into bears after two decades of bullishness.
The average forecast of handicappers tracked by Bloomberg calls for a decline in the S&P 500 next year, the first time the aggregate prediction has been negative since at least 1999. Most of them turned progressively more dour as the worst year in the market since the financial crisis moved toward its end.
Strategists often say they have no crystal ball, and the breadth of outcomes seen by 17 firms makes the point. The S&P 500 is forecast to do everything from rise 10% by next December to fall by 17%, the widest gap since 2009, reflecting a debate over the path of Federal Reserve policy and whether the economy is bound for a recession.
“There’s a divide economically, and that is what’s causing a divide among the market forecasters for the S&P 500,” said Rich Weiss, chief investment officer of multi-asset strategies at American Century Investments. “For the stock market to be down two years in a row, that doesn’t happen very often. That would assume that this recession is really going to be bad and the market continues downward or flat for a longer time.”
In almost a century of historic data, two straight years of losses or more only occurred on four separate occasions, with the latest episode coming during the bursting of the dot-com bubble.
At 4,009, the average projection for the S&P 500 calls for a decline of more than 1% by the end of 2023 from Thursday’s close.
With just one month to go, 2022 continues to be one of the most punishing years for investors. Dip buyers kept getting lured back by violent bounces, only to see shares drop to fresh lows. Outside commodities, almost every major financial asset lost money. Even trades that once worked as a hedge during market crashes, such as buying put options on the S&P 500, fell flat.
Most investors and strategists didn’t see it coming, partly because the Fed originally judged inflation to be transitory, then had to hasten monetary tightening to battle runaway consumer prices.
The S&P 500 sank into a bear market, plunging as much as 25% from its January peak. Even after a 14% rally since its October low, the index trails the most bearish projection that strategists made 12 months ago by more than 300 points.
When the bottom will arrive, however, is the topic of another debate. Binky Chadha at Deutsche Bank AG, whose S&P 500 target of 4,500 is the highest of all, expects stocks to tumble to fresh lows during the third quarter as a recession starts. The index, he says, will drop to 3,250, before staging a powerful rally to end the year higher.
Morgan Stanley’s Mike Wilson agrees that the bear market is not over, though he sees a bottom forming in the range of 3,000 to 3,300 during the first quarter, when the Fed will stop rate hikes, and the S&P 500 will finish the year at 3,900. While his team isn’t warning of an outright recession, they expect a combination of rising labor costs and weakening corporate pricing power to lead to a wave of earnings downgrades that will weigh on share prices.
“We view that scenario as an economic muddle through, and one that is still negative for margins/earnings and therefore equity markets,” Wilson, ranked as the best portfolio strategist in this year’s Institutional Investor survey, wrote in a note last month.
Disparate calls are little help for money managers who have raised cash holdings to decade highs while waiting to put the money back to work.
Bad market timing can be costly, as investors can lose by sitting out the biggest single-day gains. Take the last bull market that began in March 2020. Without the 10 best days, the S&P 500’s return would have been cut by almost half, dwindling to 63% from 114%.
While clashing views are vexing, Aneet Chachra, a fund manager at Janus Henderson Investors, says that’s not necessarily a bad thing because it forces investors to consider a wide range of outcomes, leaving the market less vulnerable to shocks.
“When volatility is high, the market is already pricing in that there can be a wider path in the future so it becomes harder for a large shock relative to expectations to happen,” he said. Still, he added, “I don’t envy the task of making these forecasts.”
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