CNBC: Strategist Says Stock Market May Become a 'Meat-grinder of Forlorn Hope' for Dip-buyers

Article by Elliot Smith in CNBC financial

Investors looking for value in the stock market during the ongoing downturn may be “deluding themselves,” according to Sean Corrigan, director at Cantillon Consulting.

Fears that central banks will have to hike interest rates aggressively to curb inflation — at the risk of quashing growth as the global economy suffers concurrent hits from the war in Ukraine and other supply shocks — have led to broad selling across global markets in recent months.

The S&P 500 closed Thursday’s session down 18% from its all-time high, approaching bear market territory.

Tech and growth stocks, which are most vulnerable to sharp rises in interest rates, have suffered particularly steep declines, with the tech-heavy Nasdaq 100 down more than 29% from its record high last year.

The negative start to the year followed a rally that had propelled global stocks from the depths of the initial coronavirus crash in March 2020 to record highs, with growth companies and tech titans leading the charge.

Some investors have chosen to see recent weakness as a buying opportunity, but Corrigan suggested that faith in the bull run could be misplaced given the macroeconomic condition.

In a note Friday, he suggested that since a substantial portion of holders of the growth stocks that had performed so well up to this year were using borrowed capital, others might be “swept away when the tide at last begins to ebb.”

“People always say the market comes down on profit taking – it comes down on loss realization. The guy who sells at the top sells to the next two guys, who realize it’s not going to hold, who sell to the next guys and if any of those are leveraged, we’re in trouble,” he told CNBC’s “Squawk Box Europe” on Friday.

“And if they’re losing a lot of money in one market, which might be somewhat peripheral to the real thing, there’s another old expression – pulling up the flowers to water the weeds. You sell the other thing to pay your margin calls or to try and reconstitute our finances, so it can spread, and we are clearly in that phase at the moment.”

Despite the risk-off sentiment that has prevailed of late, the S&P 500 remains more than 16% above its pre-Covid high in early 2020, and Corrigan argued that the world is not in a better place than it was at that stage.

“Even people who are trying desperately to convince themselves that somewhere down here, there must now be value just because the asking price is lower, are possibly still deluding themselves,” he said.

Acronym arguments deteriorating

Other speculative assets, such as cryptocurrencies, have also cratered.

In a research note Friday, Barclays Head of European Equity Strategy Emmanuel Cau said the typical acronym-based arguments that keep investors in equities — such as TINA (there is no alternative), BTD (buy the dip) and FOMO (fear of missing out) — were being challenged by the worsening .......

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