The FTSE All-World index is on its longest weekly losing streak since mid-2008, matching the period before the subprime mortgage crisis led to the catastrophic collapse of Lehman Brothers. Although a rebound late Friday was not enough to offset the brutal sell-off earlier in the week.
The index fell 2.2% for the week, while the U.S. benchmark S&P 500 lost 2.4% and the tech-heavy Nasdaq Composite lost 2.8%.
This week, the number of U.S. stocks that fell to a new 52-week low briefly exceeded 4,100, the highest level since March 2020, and nearly 75% of stocks in the S&P 500 fell. On average, constituents of the broad-based Russell 3000 index have fallen nearly 40% from their 52-week highs, according to the Financial Times.
Friday’s rally kept the S&P 500 narrowly out of a formal bear market, but few investors thought the recent volatility would end.
Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management, which manages $237 billion in assets, said:
“It’s really dangerous to try to put your market timer hat on and play that game when the market moves so volatile. In reality, the market rally will depend on whether or not the U.S. economy is in a recession a year from now.”
Efforts by the Federal Reserve to raise interest rates to fight inflation have weighed on stocks since the start of the year. Yields on the 10-year U.S. Treasury note have nearly doubled so far this year, reducing the relative attractiveness of riskier assets such as equities and weighing on corporate bond valuations.
Even those sectors that would normally benefit from higher interest rates are under pressure. The S&P 500 financial sector index fell 3.6% for the week as investors bet that an increase in loan defaults during a recession would more than offset an increase in bank margins.
Federal Reserve Chairman Jerome Powell stressed earlier this month that the central bank “will not hesitate” if further steps are needed to control inflation. On Thursday, he warned that the goal of reducing inflation to 2 percent may not be achieved without “some pain”, that there would be “some pain” in containing it.
The latest CPI data for April showed little or no slowdown in U.S. inflation, adding to concerns that the Fed may not be able to achieve a “soft landing” for the economy — a slowdown in inflation while avoiding a contraction.
Florian Ielpo, cross-asset portfolio manager at Swiss investment firm Lombard Odier, said:
“There’s only one way out of this inflationary period we’re going through right now — and that’s a slowdown in economic activity.”
Growth concerns have also temporarily halted the recent surge in government bond yields. Investors scrambled for safety as stocks fell, pushing the 10-year U.S. Treasury yield down 20 basis points this week to 2.93%.
Some investors are optimistic that any potential recession is now largely priced into asset prices. T Rowe Price, a $1.4 trillion asset manager, began reducing its holdings earlier this year and shifted some of its holdings from defensive stocks such as utilities into harder-hit sectors such as industrials and semiconductors. Since then, the company has been gradually expanding its equity exposure.
David Giroux, who manages one of the firm’s flagship funds, predicts that markets will continue to be volatile in the short term, but he is more optimistic about the longer-term outlook.
“If you wait for certainty to return, for things to get back to normal, by then you’re going to be buying stocks that are already up 30%.”