Stock market crash

Banks forecast stock market selloff anytime before year-end


Stocks are hovering around record highs with the S&P 500  of US shares up about 18% in 2021, the tech-heavy Nasdaq about 19% higher and the Europe-wide Stoxx 600 up 17%, but investors are expecting a pullback in stock markets of 5% to 10% before the end of the year.

According to a monthly poll from Deutsche Bank conducted between 7-9 September and covering over 550 market professionals across the globe, 58% of respondents are seeing a retreat of up to 10%, a cautious sign that the bull run could come to an end. Meanwhile, 1 in 10 respondents expect a correction higher than 10%. By contrast, only 31% believe the markets will reach 2022 without a decline.

In early August, Citi also said it sees a 10% correction coming because too many novice investors are piling into speculative technology stocks.

Respondents in the Deutsche Bank survey said the Covid is their top concern, while higher than expected inflation is the second biggest risk to market stability. Investors also warned that strong economic growth not materialising or being short lived was a potential risk, followed by the danger of a central bank policy error, in which high consumer prices prompt central banks to ease their stimulus at a faster pace, which would impact financial markets.

The survey showed inflation expectations for the world’s largest economy at around 2.6% over the next five years, with a large majority of investors seeing consumer prices slightly overshooting the Federal Reserve’s target.

Federal Reserve Chair Jerome Powell said in August that recent inflation readings are “a cause for concern” but warned that history shows that increasing interest rates too soon, in response to temporary price increases, can weaken hiring and hurt the unemployed. More recently, Powell said the central bank will start dialing back its ultra-low-rate policies before the end of the year.

stock market DB survey
(Source: Deutsche Bank Research)

Hiring across the U.S. pulled back dramatically in August. The U.S. economy added 235000 jobs last month, after surging 1.053 million in July, falling far short of estimates. The Labor Department
report came as economists have been sharply marking down their gross domestic product estimates for the third quarter. A survey of 71 investment firms showed that the U.S. economy is now expected to grow about 6% this year, which would still be the fastest pace since 1984 but below the almost 7% rate that was projected at the end of July, according to Bloomberg.

U.S. stock markets were under pressure last week, with the S&P 500 logging its first five-day losing streak since mid-February. Several factors weighing on sentiment, including September’s reputation for being a relatively weak month for the markets.

October can be volatile. The Great Crash of 1929 was a collapse of stock prices that began on Oct. 24, 1929, paving the way into America’s Great Depression of the 1930s. The Black Monday crash of 1987, occurred on October 19, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day and marked the start of a global stock market decline.

Banks including Citi, Bank of America, Morgan Stanley and Credit Suisse told clients to trim exposure to stocks last week. Some are predicting a sharp fall in prices.

“You should always be expecting a 10% correction. If you’re investing in equities, you should be prepared for that at any time” Morgan Stanley’s chief investment officer Mike Wilson told Yahoo Finance.

A combination of challenges from weaker-than-expected economic growth, debt burden,
staff shortages, lingering supply-chain disruptions, geopolitics, rising uncertainty will continue to weigh on sentiment.