International polled 20 prominent market strategists from July 26 to 30, asking them to forecast when the next big drop in stock prices will occur. The respondents also predicted the size of the fall and shared their strategies for playing it.
The strategists, all of whom were based in the United States or Asia, were granted anonymity by analysts.
When will the market crash occur?
The United States and Europe have risen as vaccination campaigns have boosted economic confidence and loose monetary policies have kept markets awash in cash. Strong investor sentiment has benefited major Asia-Pacific markets such as India, South Korea, and Australia.
However, persistent concerns are working against that optimism: Will rapidly evolving Covid variants take lives and put countries back under lockdown? Inflation, how real is it? Will corporate profits continue to rise?
Because markets have been buoyed by low interest rates, the beginning of the Fed’s withdrawal of monetary accommodation may cause a bond market tantrum, followed by a stock market tantrum.
17 of the 20 analysts who spoke with analysts believe global markets will fall this year — and most believe it will happen sooner rather than later.
Eleven people predicted the drop would occur in September, three in October or November, and two in December. When asked which period would see the sell-off, one responded, “all of the above.”
Only one of the three optimists believes markets are in a long-term bull market. According to two sources, the drop will occur, but not until the first quarter of next year.
Right now, there are several factors at work.
A separate analysts International poll of 30 strategists conducted in May found that a clear majority expects inflation to be temporary as the United States and other advanced economies rely on their central banks to recover from the pandemic’s toll. Inflation would put central banks’ ability to maintain easy monetary policies in jeopardy.
But the money will not continue to flow from central banks indefinitely, and things will change when some of that liquidity runs out.
“Markets have been buoyed by low interest rates, so the beginning of the Fed’s monetary accommodation withdrawal could cause a bond market tantrum followed by a stock market tantrum,” one strategist predicted.
However, as another respondent pointed out, there is little reason for the Fed to act right now.
“To be clear, the risks remain to the downside, and the delta variant, combined with transitory inflation… will relieve the Fed of the need to begin tightening any time soon,” he said.
The survey participants agreed that the surging delta variant is a major threat to the economy. Its spread will influence both fiscal and monetary policy.
“The number of Delta variant cases is growing. If a booster shot is required but is delayed, this could cause some economic confusion/concern,” one respondent wrote via email. “In addition, President Biden will need to finalize his tax plan before the ’22 elections… As a result, you could have: Fed Tapering + Increased Tax Plan + Delta variant increasing all at the same time…”
How much of a drop will the market experience?
Half of those who responded to analysts’s poll — ten strategists — predicted a 5% -10% drop. Six respondents predict a steeper decline of up to 15%.
A small minority went to the extremes, calling for drops of less than 5% or between 15% and 20%. No survey participant predicted a drop of more than 20% in the near future.
Nonetheless, one analyst argued that there isn’t much room for error in markets these days, especially if regulations tighten in the United States.
“Global markets in general, and the United States in particular, are priced for perfection,” he said, “largely ignoring… government and political priorities shifting away from free markets and toward greater regulation and tighter oversight.”
What to Buy Advice
Strategists recommended a wide range of sectors to buy if a sell-off occurs, with real estate investment trusts (REITs), large technology names, and health-care stocks topping the list.
“Dividend growth in the recovery and the ability to potentially increase rents” if inflation rises put REITs in a position for “further good returns,” according to one Asian institutional investor. Three other people are interested in REITs as well.
Twenty strategists predict when and how far stocks will fall in the next big drop.
From electric vehicles to hydrogen, Bank of America has named stocks to trade in a $2 trillion market that is just getting started.
Singapore’s largest bank has chosen three airlines to acquire, one of which has the “cheapest recovery play.”
Amazon, Apple, and Microsoft in particular, or Big Tech in general, were recommended as stocks to buy when markets fell by a group of five strategists. Another two prefer “growth” stocks, which are frequently misunderstood to be tech stocks.
One sell-side analyst suggested the iShares Biotech ETF as a health-care investment, while another suggested vaccine maker Pfizer. One analyst suggested Starbucks and Walt Disney as good investments among a couple who said they’ll bet on consumers.
Two strategists recommended dividend-paying companies, while others recommended energy stocks, financial stocks, and telecommunications companies.
The Chinese government’s crackdown
A slowdown in China as a result of the country’s ongoing regulatory crackdown could harm global growth, according to one respondent who admitted that “my biggest concern deals with China.”
“If their increasing restrictions cause a slowdown in Chinese growth, it will have implications for global growth,” he said.
“However, I’m also concerned that people are overly complacent about what is going on with China Evergrande Group,” he said, referring to a real estate conglomerate that has recently come under scrutiny for outstanding debts.
Even if China’s economy slows, such a slowdown would create “excellent” buying opportunities in emerging markets.
“Those who save a little money now will be able to get some great deals in the fall,” he says.