Investors should brace for a 10% market correction over the next few weeks, warns the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organisations.
The warning from deVere Group’s Nigel Green comes as major central banks continue their battle to try and tame inflation and differing signals from stock and bond markets.
He says: “We expect the US Federal Reserve will raise interest rates once again at its upcoming May meeting; the Bank of England’s chief economist has hinted at a further interest rate rise next month; and a half-point interest rate increase can’t be ruled out for the European Central Bank’s meeting next week according to Executive Board member Isabel Schnabel.
“This is likely to cause jitters in the market as some investors, concerned about short-term profits, will move into panic-selling mode.
“Furthermore, they will have legitimate concerns that further rate hikes now – when monetary policy time lags are notoriously long – could steer economies into a recession.
“The time lag in monetary policies is very high. Economists estimate interest rate changes take up to 18 months to have the full effect. This means monetary policymakers need to try and predict the state of the economy for up to 18 months ahead.
“With inflation seemingly having peaked, central banks are slowly winning the battle, and officials now need to take their foot off the brake.”
Stock markets are currently calm and enjoying a month-long rally. This suggests that confidence in the outlook for profits and dividend growth is returning. And yet core major bond markets continue to be marked by inverted yield curves, which suggest a recession is ahead.
“We’ve seen solid gains on all the major stock markets over the last month. Fear of a further crisis in the financial system has subsided, and investor risk appetite has returned,” notes Nigel Green.
“In addition, stock market volatility has fallen, with the VIX index of implied volatility on the S&P500 at 17.8, near an 18-month low.
“Investors appear to be seeing beyond the current interest rate cycle and its likely impact on company earnings and looking ahead to the next upswing in the economic cycle.”
He continues: “In contrast, the bond market is very much focused on the interest rate cycle, with yield curves inverted in the US, UK and Eurozone. Longer-term lending rates are below the overnight rates set by central banks.
“This reflects fear that the final rounds of interest rate hikes from the major central banks this spring and summer may tip economies into recession.
“The IMF, never an organisation to be glass half full, recently supplied a number of arguments as to why recession might occur. They included reduced real wages (because of inflation), low investment spending, and the need for governments to repair their finances after Covid-era deficits.”
The deVere Group CEO goes on to add: “This huge disconnect between stocks and bonds suggests that investors should brace themselves for significant volatility in global financial markets over the next few weeks. We could see a 10% correction.”
He concludes: “We expect that we’re currently in the ‘calm before the storm’ phase.
“That said, a market correction is a natural part of the market cycle and can present major buying opportunities for long-term investors who are willing to weather short-term volatility.”