Investors should sell the rallies; S&P 500 can fall another 10%: Chris Wood

Christopher Wood, global head of equity strategy at Jefferies believes that S&P 500 has more room for downside. Investors, he suggests, should look to exit stocks on any intermittent bounce-back.

Despite the sharp 20 per cent fall from its peak that has put the S&P 500 index in bear territory, Christopher Wood, global head of equity strategy at Jefferies believes there is more room for downside. Investors, he suggests, should look to exit stocks on any intermittent bounce-back.

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“The outlook remains the inverse of Goldilocks with GREED & fear remaining firmly of the view that investors should look to sell rallies. The minimum decline investors should expect, if the Federal Reserve sticks to its current tightening agenda, is a 30 per cent decline in the S&P 500 with that index so far down 20.9 per cent from the high at the worst point on May 20," Wood wrote in his weekly note to investors, GREED & fear.

A reminder that the US Federal Reserve remains, for now at least, under political pressure to tighten came with the release of the Pew Research Center poll this month, Wood wrote, which showed that Americans are concerned about inflation than any other issue. A total of 70 per cent of Americans viewed inflation as “a very big problem” for the country, followed by 55 per cent as regards affordability of healthcare and 54 per cent violent crime, according to a survey conducted between April 25 and May 1. CLICK HERE FOR SURVEY FINDINGS

Global financial markets have tumbled as inflation surged, which prompted most central banks, including the US Federal Reserve and the Reserve Bank of India (RBI), to turn hawkish and hike interest rates.

Inflation in the US, for instance, hit a 41-year high of 8.3 per cent in April, slowing a tad from 8.5 per cent recorded in March. Back home, consumer price inflation (CPI) rate touched an 8-year high of 7.79 per cent in April. On the other hand, the wholesale price index (WPI)-based inflation rate surged to 15.08 per cent in April as commodity and vegetable prices soared. With this, WPI-based inflation has been in double-digits for 13 consecutive months, data showed.

In this backdrop, the frontline indices, the S&P BSE Sensex and the Nifty50, have slipped around 7 per cent each thus far in calendar year 2022 (CY22). Most analysts expect the Indian markets to remain choppy in CY22 as they adjust to the 'new normal' of rising inflation and interest rates, which they believe will open more investment avenues for investors, especially in the fixed income/debt segment. That said, the risk-reward for investors, they believe, will become favourable should the equity markets correct more from here on.

“The Nifty Index is currently trading at a 12-month forward price-earnings (PE) ratio of 17.5x, in line with the pre-COVID-19 3-year average of 17.5x, and marginally above the pre-COVID-19 5-year average of 16.9x. A further 3 per cent to 5 per cent correction in valuation for the Nifty Index will potentially make risk-reward favorable for India, as the fundamentals such as corporate leverage and return on equities (ROEs) are much better than pre-COVID-19 levels,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, India in a recent coauthored note with Premal Kamdar.