So far, 2022 has been a year where almost everyone on Wall Street got it wrong. Just like the Fed and a cadre of global central banks.
Back in December, strategists at the world’s largest investment firms like JPMorgan Chase & Co. predicted the S&P 500 would gain 5% in 2022.
Economists saw the 10-year US Treasury yield average 2% at the end of the year. And even Goldman Sachs Group Inc. gave credence to claims that Bitcoin was on track to hit $100,000.
Yet six months later, an unprecedented confluence of shocks brought one of the most powerful bull markets to an end and sent government bonds and other safe-haven assets soaring.
The S&P 500 is down 23%, 10-year rates are at 3.23%, and Bitcoin has lost more than half its value.
The market has quickly moved from “buy everything” to “sell everything”, the multi-year “there is no alternative” (TINA) phenomenon in equities is now gone.
Unforeseen events, including the Russian-Ukrainian war, contributed to the highest consumer prices in 40 years.
And as a result, ultra-low interest rates and monetary stimulus — essentially the bedrock of post-pandemic recovery — evaporated as the Fed and its counterparts sought to stifle inflation.
“This is absolutely the end of TINA for the foreseeable future,” said James Athey, chief investment officer at abrdn in London. “With 8% inflation, not much is attractive on a real basis.”
Even Jerome Powell, the president of the central bank, did not see the turbulence linked to inflation.
He expects price gains to decline to levels closer to the Fed’s long-term target of 2% by the end of 2022.
But now, bond markets are showing signs of recession as the Fed’s aggressive rate hikes pose a risk to the economy’s growth.
“At this time last year, the Fed itself was still expecting [rates] be close to zero at this point,” said Deutsche Bank strategist Jim Reid.
In less than six months, that needle is now pointing to 3.5% by the end of 2022.
bear with me
Even with the steep declines, however, market gurus believe equities will rally by the end of the year.
Oppenheimer’s John Stoltzfus still sees the S&P 500 ending 2022 at 5,330 points, requiring a 45% rally over the next six months. A handful of others, including JPMorgan and Credit Suisse Group AG, have targets that require the index to rally at least 30% to be met.
Wall Street strategists, on average, see the S&P 500 gaining 22% from Friday’s level in the latest Bloomberg survey.
Certainly anyone can guess when Russia’s war in Ukraine will end or if supply chain bottlenecks due to China’s strict Covid policies will ease, increasing pressures on prices in addition to Fed policy tightening.
But for Max Kettner, chief multi-asset strategist at HSBC Global Research, equities have not fully priced in a recession relative to other asset classes. “Overall, this means there is even more weakness for risk assets in store over the summer months.”
The benchmark S&P 500 index fell 51% from high to low between 2000 and 2002, and 58% during the period of the global financial crisis.
Similarly, Morgan Stanley’s Michael Wilson – one of the few bearish voices in December – said the market’s more than 20% decline still did not fully reflect the risks to corporate earnings.
Nowhere to hide
At first glance, all one can do is hide money under the mattress with gold and US Treasuries – arguably the safest financial assets in the world – which are also sinking. .
Stocks and bonds are on track for their worst quarter ever. Meanwhile, credit markets have also been hit hard.
So far this year, the world’s safest corporate debt pool has lost more than $900 billion, marking its worst first half on record, according to data from the Bloomberg Index.
Measures of corporate credit risk are also rising, with credit default swaps insuring blue-chip European corporate debt at the highest since April 2020.
However, perhaps no other asset class has seen such wild swings in 2022 as cryptocurrencies.
Despite all the calls for Bitcoin to hit $100,000 earlier this year and claims that this is an inflation hedge, the digital asset market is in a downward spiral.
Bitcoin has lost two-thirds of its value since hitting a high of nearly $70,000 in November.
Arguments that the world’s largest cryptocurrency was akin to gold and an independent store of value have died down.
Meanwhile, the crypto ecosystem of miners, traders and exchanges has come under increasing scrutiny amid layoffs, freezing withdrawals and liquidity issues.
It is still not easy to achieve anything in this market. There were big rallies and big withdrawals, painting a bleak picture. But HSBC’s Kettner said the trigger for this year was obvious.
“Just as investors were obsessed with the idea of ’transient inflation’ last year, the obsession in 2022 so far has been ‘peak inflation,'” he said. Inflation has not proved transitory and has not yet peaked. As such, “the last few days have been brutal”.
–With help from John Cheng, Michael Msika, Hannah Benjamin, Tanzeel Akhtar and Ksenia Galouchko.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)