Economic downturn still not bottoming out: investment banks wary of stock markets

Economic downturn still not bottoming out: investment banks wary of stock markets - TINA transitioning to TARA

In the lead-up to the fourth quarter, JPMorgan Asset has opted to remain underweight on stocks, reflecting a growing trend among investment firms. Firms like Fidelity International are adopting a tactically defensive stance on equities, focusing on quality companies with strong defensive characteristics to navigate an uncertain market environment.

The S&P 500 and Stoxx Europe 600 ended Monday at their lowest levels since December 2020, signalling a significant downturn in global stock markets. This trend has led to a global stock market plunge, with the MSCI World Index losing more than $8 trillion in value from its mid-September peak, primarily due to rising yields and the US dollar.

Goldman Sachs strategists have lowered their year-end target for the S&P 500 Index from 4,300 to 3,600, and have downgraded stocks to underweight in their global allocation for the next three months. BlackRock strategists share similar sentiments, advising investors to avoid most stocks and tactically underweight stocks of developed countries.

The surge in government bond yields, largely due to the Fed's tight monetary policy, has provided an alternative to riskier assets like stocks. This shift has led to a change in the mantra from "TINA" (There Is No Alternative) to "TARA" (There Are Real Alternatives) in the stock markets. Bonds are now seen as a safer haven, with Goldman Sachs strategists viewing them as a reasonable alternative to stocks.

The risk of a global recession is on the rise, with the probability estimated to be over 40% after the recent sell-off in the bond market. This is a concern shared by both Goldman Sachs and BlackRock, who have become more pessimistic about stocks due to this risk. According to research, this level of probability is only seen during acute downturns, such as 2020 and 2008-2009.

Sylvia Sheng, Global Multi-Asset Strategist at JPMorgan Asset, prefers investment-grade credits over junk bonds in this uncertain market climate. Meanwhile, Europe strategists, including Sharon Bell, have cut their targets for regional equity indices and downgraded their 2023 earnings per share growth forecast for the Stoxx Europe 600 Index to -10%.

Recent research from Ned Davis Research has triggered a "severe" recession signal, with their global recession probability model surging to over 98%. According to Bell and her colleagues, this bear market has not yet reached its bottom.

In conclusion, the global stock market is facing a period of uncertainty, with many investment firms adopting defensive strategies and a shift towards bonds as a safer alternative. The risk of a global recession is a significant concern, with many strategists predicting a further downturn in the stock market.