S&P could plunge 75% to 550, says SocGen perma-bear Albert Edwards
S&P could drop below 666—the low of the financial crisis, Edwards says
The bears have already taken over, says SocGen strategists
If a 6% slide in the S&P 500 in only the first six days of trading in 2016 didn’t scare investors, then Albert Edwards’s recent prediction might.
According to Edwards, global strategist at Société Générale and prominent perma-bear, the stock benchmark SPX, -1.56% could falls as much as 75% from the recent peak of 2,100 to trade around 550. Edwards argues that stocks are already in a bear market—commonly defined as a 20% fall from a recent high—and that U.S. industrial production is shaky and could represent the beginning phases of a recession. That’s bad news for stock-market bulls.
“The previous bear market low was in March 2009 when the S&P reached 666. I think we’ll go below that within this bear market,” Edwards said at the sidelines of a conference in London on Tuesday.
A fall to below 666 would have been a plunge of 65% from Tuesday levels, but if the bottom is around 550, the size of the decline would be 72%. Measured against the recent peak, it would be a steeper 75%.
Investors have speculated whether stock markets are just facing a correction or a bona fide bear market after panic on the back of worries about a slowdown in the world’s second-largest economy, China, and plunging oil prices. Those dual factors pummeled U.S. stocks last week, resulting in the worst opening week for Wall Street ever.
But according to Edwards, a long-term bear market is already at hand.
The annual presentation to investors in London is usually considered a doom-and-gloom event, where SocGen lays out the scenarios that could trigger a global market rout.
“Everything seems to be coinciding at the moment. I think normally people come along [to the Société Générale strategy event] this time of the year and it’s like ‘What did you see at the bear case event’, and still they feel fundamentally OK. But this time I think people were quite nervous,” he said.
Prosperity illusion ‘shattered’ In a report published on Wednesday, the SocGen bear elaborated on his pessimistic outlook. He explained that the “coming carnage” is an indirect result of the quantitative easing program launched by the Federal Reserve after the financial crisis in an effort to ease pain in the economy. However, the aggressive stimulus measures have done little to stimulate growth and instead served to inflate “global asset prices into the stratosphere,” Edwards said.
“A commodity bubble and the resultant U.S. shale investment boom were all consequences of the Fed’s QE. The illusion of prosperity is shattered as boom now turns to bust. But I do hope this time around the [British] Queen won’t ask, as she did in November 2008, why nobody saw this coming,” he said.
He further noted that for previous bear markets, it has taken four to six recessions to shake off the weak sentiment, as laid out in the chart below. That means, that after only two recessions in this current cycle, the bear market has not yet been completed.
Pring Turner, Société Générale
Andrew Lapthorne, head of quantitative equity research at SocGen, supported his colleague’s bearish outlook at the conference on Tuesday. He explained that momentum investors—those that jump on existing, successful market trends—recently have started to buy defensive stocks, which is a clear indicator “you have a bear market”. Defensive stocks are usually popular when the economy sours, as they aren’t tied to the economic cycle.
So what is an investor to do? Lapthorne’s idea is to do nothing and definitely not picking up beating down stocks.
“When we see equities starting to lose value, the immediate reaction is, ‘well things must be cheap’. But because we’ve had such an outrageous increase in valuations, we’re a long, long way from seeing assets become cheap again,” he said.
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