After a steep sell-off on Wednesday pushed the S & P 500 to the brink of bear market territory, one strategist warns there could be more pain ahead. After Target’s expectations of earnings fell short, Wall Street began to see a drop in margins. This report sent Target’s stock down almost 25%. It came just days after Walmart blamed rising labor and fuel costs for their earnings loss. The Dow Jones Industrial Average and S & P both posted their worst drops since June 2020 on Wednesday. According to Gary Dugan (CEO and CIO at The Global CIO Office), this sell-off may just be the start. Dugan, speaking to CNBC’s Capital Connection Thursday, said that Wednesday was the first session of trading in which dire economic forecasts showed up in corporate earnings. “All things were calm up until now. Corporate earnings projections for the U.S. in the first quarter have been described as being better than anticipated and all was well. But, as we saw, when someone comes with a surprise as Target did overnight, share prices fall 25%,” Dugan, who has held CIO roles at both Barclays and Merrill Lynch in London, said. “That is really a warning to markets that we could see some significant downside as more and more S & P companies reflect on the challenges at hand.” Jerome Powell, Federal Reserve Chairman has indicated that the bank won’t hesitate to raise interest rates to reduce inflation. The annual rate of 8.3% was recorded in April. The possibility of more aggressive tightening of monetary policy has only aggravated the recessionary fear. The Dow will begin Thursday’s trade down more than 13% since the turn of the year and the S & P almost 18%, with futures pointing to further selling when trading opens on Wall Street. Dugan indicated that “I think that we could comfortably drop another 15% from now and that would bring us down to the trend line which ended right before Covid.” To help the economy get through the Covid-19 crisis, central banks and governments used extremely loose fiscal and monetary policies. This drove stock markets from lows of March 2020 to highs late in 2021. Dugan claimed that these policies were “not consistent in history.” He stated, “We need to return to normal. We have to go back to regular valuations and to companies that don’t have to be supported by very low interest rates or loose government policies.” So if you look at that package, I believe 15% brings us back to fair values. Opportunities in Asia. The U.S. will likely continue to slide into negative territory. Dugan advised investors that they look at emerging markets for opportunities. “I’m personally invested, for example, in Vietnam – fantastic long term story, the right demographics, and a valuation in many of these parts of the world, including here in the Middle East, that were not as extreme,” he said. In the 18-months following Wall Street’s March 2020 plunge, emerging markets have been generally behind Wall Street. This means valuations might be viewed as lower inflation and less susceptible to future economic pressures. Dugan stated that there are some risks if markets do not follow Wall Street. However, “the fundamentals are still very beneficial.”
Traders are seen working on the New York Stock Exchange’s floor (NYSE) in New York City on May 18, 2022.
Spencer Platt | Getty Images
Following a sharp sell-off Wednesday, the S&P 500A strategist cautions that there may be more pain in the future as we approach bear market territory.
