Global stocks sank for a sixth consecutive week as the threat of a US recession added to the fears of investors who were grappling with rampant inflation, coronavirus lockdowns in China and Russia’s invasion of Ukraine.
The FTSE All-World index is on its longest weekly losing streak since the middle of 2008, equalling in duration the decline before the subprime mortgage crisis led to the catastrophic collapse of Lehman Brothers. A late bounce on Friday was insufficient to offset a brutal sell-off earlier in the week.
The index dropped 2.2 per cent this week, while the US benchmark S&P 500 index fell 2.4 per cent and the tech-dominated Nasdaq Composite slid 2.8 per cent.
Friday’s rebound meant the S&P 500 narrowly avoided falling into a formal bear market, when an index declines 20 per cent from its recent highs. But few investors were prepared to call an end to the recent volatility.
“When movements are this erratic, it’s really dangerous to try to put on your market timer hat and play that game,” said Matt Stucky, a portfolio manager at Northwestern Mutual Wealth Management, which manages $237bn. “Really, it’s going to boil down to whether or not the US economy is in recession a year from now.”
The Federal Reserve’s efforts to fight inflation with higher interest rates have been putting pressure on stocks since the start of the year. The yield on 10-year US Treasuries has nearly doubled since the start of the year, which reduces the relative appeal of riskier assets such as stocks and has weighed on the valuations of corporate bonds.
The number of shares in the US falling to new 52-week lows surpassed 4,100 at one point this week, its highest level since March 2020. The average stock in the broad-based Russell 3000 index is down nearly 40 per cent from their 52-week highs, according to FT calculations.
This week even sectors that would normally benefit from higher rates also came under pressure. The S&P 500 financial sub-index fell 3.6 per cent, as investors bet that the addition to banks’ profit margins would be more than offset by an increase in loan defaults during a recession.
Fed chair Jay Powell earlier this month stressed the central bank “won’t hesitate” if it needs to take extreme measures to bring inflation under control, and this week warned taming inflation would cause “some pain”.
New data showing that price rises barely slowed down in April, therefore, added to concerns the Fed would be unable to achieve a so-called “soft landing” that avoids an economic contraction.
“There is only one way out of this inflationary period we are currently experiencing — and that is a slowdown in economic activity,” said Florian Ielpo, multi-asset portfolio manager at Lombard Odier.
Growth concerns also brought a temporary halt to the recent surge in government bond yields. A search for safe assets as stocks declined pushed the yield on the 10-year Treasury 0.2 percentage points lower over the week, to 2.93 per cent. Lower yields reflect higher prices.
US worries were exacerbated by disappointing updates from China, which is struggling to contain coronavirus outbreaks without severely damaging its economy. However, Shanghai’s CSI 300 recovered from a weak start to the week to end higher, as did Europe’s Stoxx 600, which is less dominated by technology companies than the US market.
Some investors were optimistic that the bulk of any potential downturn was now baked into asset prices. T Rowe Price, the $1.4tn asset manager, has been gradually building its exposure to equities after starting the year underweight and rotating some of its holdings from defensive sectors, such as utilities, into more beaten-down areas such as industrials and semiconductors.
“Markets are pricing in a very high probability of a very bad event playing out; if it doesn’t, some of those cyclical stocks will massively re-rate higher, and if it does happen they’ve already priced a lot of that in,” said T Rowe portfolio manager David Giroux.
Giroux, who manages one of the firm’s flagship funds, predicted markets would continue to be volatile in the short-term, but said he was more optimistic about the longer-term outlook.
“If you wait for certainty to return, for the all-clear, you’re going to be buying things that are already up 30 per cent.”