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May 19, 2022, 9:38 a.m. EDT

Will the stock market drop 20% or 48% from the peak? Here’s the key factor, says this strategist.

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By Barbara Kollmeyer

“Is the economy under control or is it spiraling out of control? That’s the million-dollar question traders continue arguing over,” sums up CrackedMarket blogger Jani Ziedins.

Clearly, the latter argument prevailed — again — after Wall Street’s worst day in two years , and futures hinting of more pain for Thursday. Among the gloomsters, Guggenheim’s Scott Minerd warned of a possible “summer of pain” — a 45% drop from the top for the S&P 500 and 75% down for the Nasdaq.

Read: Markets haven’t acted like this since 1981 — and here’s how that played out

No doubt, Wall Street has been ratcheting stock forecasts lower in recent months. On the side of optimists, JPMorgan’s ever-stoic top equity strategist Marko Kolanovic told Bloomberg (in an interview before Wednesday) that equities will “climb out of this hole,” as recession and stagflation fears are overblown.

Indeed, our call of the day from Evercore strategists says that markets are spiraling on the view that recession is a foregone conclusion. They also say that panicky, leveraged retail investors who have been behind this selloff, should calm down soonish as the pros aren’t running scared (yet).

“On Thursday, we will get an idea whether the market action is part of a volatile bottoming process, our base case, or whether the decline could materially undercut SPX 3,854, triggering a capitulation trade,” notes the Evercore team, led by Julian Emanuel.

Offering their view of what’s been happening with this selloff, Emanuel and the team argue that markets have been caught up in Fed “misdirection,” rallying despite hawkish remarks from Chair Jerome Powell, then giving it all back a day later, echoing what happened after the early-May Fed meeting.

What’s key here is not whether markets understand the Fed’s intent, but “whether a recession in 2022-23 is avoidable in combating generationally elevated inflation, with the only experience previously being the Volcker Fed tightening (1971-81) to the point where multiple recessions were an inevitability.”

Emanuel and the team don’t think the Fed needs to precipitate a recession, but say stocks are behaving like it does.

“The distinction is critical. The last three non-Recession Bear Markets declined on average -21.3% — 2018 a ‘V’ bottom, 2011 and 1998 a ‘W’ — though none registered as an ‘official’ Bear. The last three Recession Bear Markets (2020, 2007-09, 2000-02) declined on average -47.9%,” says Evercore.

Panicky investors, notably on the retail side (they’ve been blamed before), should calm down soonish, it says.

Read: A larger share of younger investors say they’re not afraid to buy the dip in the pursuit of long-term gains — but there’s one big caveat

“We continue to expect the Public (whose job prospects remain robust andbalance sheets healthy) liquidating its Margin Debt to yield to the contrary signals/Misdirection of depressed sentiment and defensive professional positioning, stabilizing stocks in the days ahead,” say the strategists.

The buzz

Cisco Systems /zigman2/quotes/209509471/composite CSCO +0.93% is on track to open at its weakest since late 2020 as China’s COVID-19 lockdowns battered its outlook .

After Walmart /zigman2/quotes/207374728/composite WMT +0.25% and Target /zigman2/quotes/207799045/composite TGT -1.51% downbeat results this week, Kohl’s /zigman2/quotes/210414114/composite KSS -5.24% is down on weak earnings and slashed forecasts, a day after two executives left . Bed Bath & Beyond /zigman2/quotes/209801102/composite BBBY -3.23% stock also down on weak guidance from late Wednesday.

Read: Wednesday’s worst-performing stocks mostly come from this one sector that has investors really worried

/zigman2/quotes/209509471/composite
US : U.S.: Nasdaq
$ 42.35
+0.39 +0.93%
Volume: 5.15M
July 6, 2022 12:01p
P/E Ratio
14.84
Dividend Yield
3.60%
Market Cap
$173.75 billion
Rev. per Employee
$648,818
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/zigman2/quotes/207374728/composite
US : U.S.: NYSE
$ 124.56
+0.31 +0.25%
Volume: 2.45M
July 6, 2022 12:01p
P/E Ratio
26.82
Dividend Yield
1.79%
Market Cap
$340.59 billion
Rev. per Employee
$250,440
loading...
/zigman2/quotes/207799045/composite
US : U.S.: NYSE
$ 143.51
-2.20 -1.51%
Volume: 880,352
July 6, 2022 12:01p
P/E Ratio
11.91
Dividend Yield
3.01%
Market Cap
$67.57 billion
Rev. per Employee
$237,729
loading...
/zigman2/quotes/210414114/composite
US : U.S.: NYSE
$ 27.87
-1.54 -5.24%
Volume: 2.49M
July 6, 2022 12:01p
P/E Ratio
4.33
Dividend Yield
7.18%
Market Cap
$3.78 billion
Rev. per Employee
$194,556
loading...
/zigman2/quotes/209801102/composite
US : U.S.: Nasdaq
$ 4.49
-0.15 -3.23%
Volume: 3.81M
July 6, 2022 12:00p
P/E Ratio
N/A
Dividend Yield
0.00%
Market Cap
$370.67 million
Rev. per Employee
$230,543
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