Global stocks fell for a sixth consecutive week as the threat of a recession in the United States added to fears among investors grappling with runaway inflation, coronavirus blockages in China and the invasion of Ukraine by Russia.
The FTSE All-World Index is on its longest streak of weekly losses since mid-2008, matching in duration the decline before the subprime mortgage crisis led to the catastrophic collapse of Lehman Brothers. A late rebound on Friday was not enough to offset a sharp selloff earlier in the week.
The index fell 2.2% this week, while the US benchmark S&P 500 fell 2.4% and the tech-dominated Nasdaq Composite fell 2.8%.
Friday’s bounce helped the S&P 500 narrowly avoid falling into a formal bear market, when an index falls 20% from recent highs. But few investors were ready to put an end to the recent volatility.
“When the moves are this erratic, it’s really dangerous to try and put on your market timer hat and play this game,” said Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management, which manages $237 billion. dollars. “Really, it’s going to come down to whether or not the US economy is in a recession a year from now.”
The Federal Reserve’s efforts to fight inflation with higher interest rates have put pressure on equities since the start of the year. Yields on 10-year US Treasuries have nearly doubled since the start of the year, reducing the relative appeal of riskier assets such as equities and weighing on corporate bond valuations.
The number of stocks in the United States falling to new 52-week lows exceeded 4,100 at one point this week, its highest level since March 2020. The average stock of the general Russell 3000 index is down up almost 40% from its 52-week high, according to FT calculations.
This week, even sectors that would normally benefit from higher rates have also been under pressure. The S&P 500 financials sub-index fell 3.6% as investors bet higher bank profit margins would be more than offset by higher defaults during a recession.
Earlier this month, Fed Chairman Jay Powell stressed that the central bank “will not hesitate” if it has to take extreme measures to control inflation, and this week warned that bringing inflation under control inflation would cause “some pain”.
New data showing price increases barely slowed in April, thus adding to fears that the Fed may not be able to pull off a so-called “soft landing” that averts an economic contraction.
“There is only one way out of this inflationary period that we are currently going through – and that is a slowdown in economic activity,” said Florian Ielpo, multi-asset portfolio manager at Lombard Odier.
Growth concerns also temporarily halted the recent surge in government bond yields. A search for safe assets as stocks fell pushed the 10-year Treasury yield down 0.2 percentage points over the week to 2.93%. Lower yields reflect higher prices.
US concerns have been heightened by disappointing updates from China, which is struggling to contain coronavirus outbreaks without seriously harming its economy. However, the Shanghai CSI 300 recovered from a weak start to the week to end higher, as did the European Stoxx 600, which is less dominated by tech companies than the US market.
Some investors were optimistic that most of any potential slowdown was now priced into asset prices. T Rowe Price, the $1.4 billion asset manager, has gradually increased its equity exposure after starting the year underweight and is rotating some of its holdings from defensive sectors, such as utilities, towards more disadvantaged sectors such as industries and semi-conductors.
“Markets are pricing a very high probability of a very bad event happening; if not, some of these cyclical stocks will be massively repriced higher, and if that happens they’ve already priced in a lot of that,” said T Rowe portfolio manager David Giroux.
Giroux, who manages one of the company’s flagship funds, predicted markets would remain volatile in the short term, but said he was more optimistic about the longer-term outlook.
“If you wait for certainty to come back, for the green light, you’re going to buy things that are up 30% already.”