Ice Age De-Rating of Equity Markets Imminent: SocGen
U.S. stocks finished at multi-year highs on Thursday, but rather than cheer, Societe Generale says investors should prepare for the third leg of the ice age of equity markets, which is now around the corner.
Albert Edwards, the firm’s ultra-bearish strategist says the U.S. has already entered a recession and it won’t be long before the equity market reacts.
Edwards says the resilience of the stock market despite worsening corporate profits points to high levels of hope among investors that a recession will be avoided and that the Federal Reserve is about to announce another round of quantitative easing (QE3).
He says things are much worse than the equity market indicated. He points to the “awful” durable goods orders for July, with core orders falling 4 percent month-over-month and 6.2 percent year-over-year and he highlights negative U.S. company pre-announcements for the third quarter, which are at their highest since the third quarter of 2001, according to Thomson Reuters.
“I believe that the third leg of the Ice Age de-rating in equity markets is imminent. For this secular bear market to end, investors must voluntary give up hope. Otherwise the vice-like grip of the bear will soon squeeze the hope from their gasping, broken bodies,” Edwards wrote in a note to investors.
It’s not the first time that Edwards has made bearish predictions on stocks this year. In July, he warned about the “ultimate” death cross for the S&P 500 – where the 50-month moving average falls below the 200-month moving average. Since that call in mid-July, the S&P 500 has risen another 6 percent.
A number of investors, including Bill Gross, Pimco’s co-chief investment officer have warned that the “cult of equity” that has been Wall Street’s mantra for generations is dying.
Signs that investors have been abandoning the stock market is borne out by daily trading volume, which has fallen to the lowest since September 2007.
Bulls have been pointing to a better-than-expected U.S. payrolls number in July and assurances from Fed Chief Ben Bernanke at the Jackson Hole summit that the central bank was ready to do more to rescue the economy.
But Edwards says despite the prospects of any QE3, the market won’t be able to resist the recessionary data” for long. (Read More:Fed Likely to Ease Even With Strong Jobs Report)
“The S&P will be led hand-in-hand by the economic cycle over a cliff into free-fall. That will be the third phase of this secular valuation bear market.”