Bloomberg: The worst sell-off in stocks in half a century may not be over yet

It has been a chaotic and costly time for many investors. But 2022 is only halfway over, and the stock fairy tale will likely have more twists and turns before the year is out, Bloomberg reports.

Coming off the worst first half since 1970, US stocks now face a triple whammy from inflation, recession risks and the threat to corporate profits from falling consumer confidence. After nearly everyone on Wall Street got their predictions for 2022 wrong, investors are now focusing on a toxic mix that portends stagnant inflation, as well as more damage to valuations.

“The next 10% is probably going to be down from here, not up,” said Scott Ladner, chief investment officer at Horizon Investments. “A quick market bottom will require a shift in central bank policy, and we don’t think that’s possible in the coming months.”

Indeed, the Federal Reserve is expected to continue raising interest rates as it tries to tame inflation, rather than flushing the market with cash as it did in 2008 and 2020.

This year is already one of the worst for big daily drops, with the S&P 500 down 2 percent or more on 14 occasions, putting 2022 in the top 10 on the list, according to data compiled by Bloomberg for two decades.

Still, the CBOE Volatility Index, the so-called fear gauge, is below levels seen in previous bear markets, suggesting the market has yet to see the washout needed to spark a sustained rally.

Based on the history of past bear markets, the S&P 500 should see some recovery by the end of 2022. In recession years, the story is different, with new lows coming first.

Morgan Stanley’s Michael J. Wilson, one of Wall Street’s most ardent bears, says the S&P 500 needs to fall another 15% to 20% to around 3,000 for the market to fully reflect the scale of the economic contraction. For Peter Garnry, head of equity strategy at Saxo Bank A/S, the bottom is about 35% below January’s record high, implying a further 17% drop.

“Companies like Tesla and Nvidia, as well as cryptocurrencies, need to capitulate before the speculative excesses are eliminated and a bottom is reached,” Garnry said.

Wall Street bulls see a better second half, though that won’t be enough to recoup all of the losses so far. In Europe, research strategists expect the Stoxx 600 to drop 4% year-on-year. It is currently down about 17%.