Investment managers are warning that markets probably have further to fall as China’s growth slows, oil prices plunge and central bankers lack tools to prop up economies. As Bloomberg reports, from the largest asset manager in the world to the most niche investment expert, many of the best known 'gurus' are warning there is more to come just as Morgan Stanley's James Gorman warned this morning "the size of the correction suggests it's not temporary," adding that "it might be too soon to step back into the market."
"I expect a protracted decline in the S&P 500," Jeffrey Gundlach, co-founder of DoubleLine Capital, said in an e-mailed response to questions. "Investors should sell the bounce-back rally which could come at any time."
“Excessive risk exposure is adding to the selling pressure,” Gundlach said.
"You need to have some stabilization of fundamentals to give people conviction this has gone too far," Koesterich, whose firm is the world’s largest money manager, said in an interview. "Certainly you are getting closer to capitulation. The magnitude of the drop suggests that."
Hedge fund manager Ray Dalio said global markets face risks to the downside as economies near the end of a long-term debt cycle.
“When you hit zero, you can’t lower interest rates anymore,” Dalio said, according to a transcript of the interview. “That end of the long-term debt cycle is the issue that means that the risks are asymmetric on the downside because risks are comparatively high at the same time there’s not an ability to ease.”
The rout in global stocks is being fueled by investors seeking to reduce leverage as central bank run out of options to prop up economies, according to Janus Capital Group Inc.’s Bill Gross.
“Real economies are being levered with QEs and negative interest rates to little effect,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail responding to questions from Bloomberg. “Markets sense this lack of growth potential and observe recessions beginning in major emerging-market economies.”
Credit folks are fretting too...
"The negative sentiment in the market has turned into a full-blown high yield selloff and more credits are going to run into trouble." said Kapil Singh, a money manager at DoubleLine. "High yield buyers are becoming choosier and choosier."
"A lot of funds limped into the new year hoping for a market rally but that just hasn’t happened," Mark Heron, head of distressed debt at hedge fund Ellington Management, said.
"You get the sense that there is a broader market issue," Heron said.
Complacency about the risks of contagion from the weakest segments of high yield is reminiscent of sentiment regarding subprime debt in mid-2007, Heron’s firm wrote in a November report.
And that means all those wonder M&A deals (and the premia they pumped into stocks) won't be there...
"I suspect there are a lot of deals that were teed up, ready to come to the market, that will just have to stay on the shelf for the foreseeable future," said money manager Margie Patel, at Wells Capital Management in Boston, which manages about $350 billion. "The pipeline is going to dramatically shrink."
And nor will the other pillar of support for stocks - buybacks..
Simply put, the riskiest parts of corporate debt markets are inching closer to panic mode... and stocks are slowly waking to that reality (as the 'knowledge' leaks from professionals to the rest of the market).
But some remain hopeful - "This is a financial crisis and not an economic crisis," Aguilar said during a conference call. "The U.S. economy is stable."