Stocks to Remain Under Pressure as Short Bets Soar

Headwinds in US and European stock markets are poised to continue in March as investors’ stock sentiments continue to drop. Strategists at Citigroup, in a research note to investors, note that investors are increasingly placing short bets in anticipation of further drops. The sentiments come from traders placing nearly $3 billion worth of bearish bets in the equity markets last week. In addition, investors withdrew almost $5.1 billion from exchange-traded funds, signaling waning confidence in the equity markets.

Waning Stocks Confidence

While the current positioning in the market remains positive after the gains experienced at the start of the year, net long positions have reduced significantly. The decline signals sentiments and conviction is starting to turn amid concerns the overall market has not bottomed out following last year’s rout.

The bearish stance comes on the heels of the equity market starting the year on a roll, rallying across most counters. The rally that saw the tech-heavy NASDAQ index post 13% gains came on expectations that central banks will go slow on monetary policy tightening. In addition, the expectation that the US Federal Reserve will resort to interest rate cuts to support the economy also helped keep the buying spree in the market.

Hawkish Central Banks Concern

Fast forward, things have changed for the worst, with inflation levels refusing to tank despite the high-interest rate environment. However, with inflation levels remaining elevated, there are growing concerns that central banks will resort to further interest rate hikes to slow down the pace of price increases.

A high-interest rate environment supported by further hikes always works against sentiments in the equity markets. It fuels demand for yielding securities such as treasuries and bonds. However, the growing fears that high-interest rates would tip the global economy into recession, given the high borrowing cost, continues to rattle investor sentiments on stocks.

The S&P 500 has been down for three straight weeks amid concerns about the elevated inflation levels and the prospect of the FED remaining hawkish. In addition, with borrowing costs increasing significantly, companies need help accessing cheap capital to fuel economic activities.

Stock Market Outlook

Stocks are expected to remain under pressure in March amid the uncertainty on monetary policy. The prospect of interest rates remaining at elevated levels should continue to fuel recession risk, which could weigh on investors’ sentiments. Likewise, faltering earnings and high valuations continue to rattle investors.

Analysts at Morgan Stanley have echoed similar sentiments to their Citigroup counterparts insisting that March is a high-risk month in the equity markets. The strategist expects the market to bottom sometime in the second half of the year after the S&P 500 has slid by as much as 24% in the first half of the year.

According to strategists at JPMorgan, the risk-reward for equities remains poor, given the uncertainty triggered by high inflation and monetary policy tightening. Interest rates and the dollar need to drop for the investment outlook to improve. For investors still looking to invest, some of the best plays can be found in value sectors in non-rate sensitive and defensive sectors.