Will the stock market drop 20% or 48% from the peak? Here's the key factor, says this strategist.

Will the stock market drop 20% or 48% from the peak? Here’s the key factor, says this strategist.

“Is the economy under control or is it spiraling out of control? That’s the million-dollar question traders continue arguing over,” sums up CrackedMarket blogger Jani Ziedins.

Clearly, the latter argument prevailed — again — after Wall Street’s worst day in two years, and futures hinting of more pain for Thursday. Among the gloomsters, Guggenheim’s Scott Minerd warned of a possible“summer of pain” — a 45% drop from the top for the S&P 500 and 75% down for the Nasdaq.

Read: Markets haven’t acted like this since 1981 — and here’s how that played out

No doubt, Wall Street has been ratcheting stock forecasts lower in recent months. On the side of optimists, JPMorgan’s ever-stoic top equity strategist Marko Kolanovic told Bloomberg (in an interview before Wednesday) that equities will “climb out of this hole,” as recession and stagflation fears are overblown.

Indeed, our call of the day from Evercore strategists says that markets are spiraling on the view that recession is a foregone conclusion. They also say that panicky, leveraged retail investors who have been behind this selloff, should calm down soonish as the pros aren’t running scared (yet).

“On Thursday, we will get an idea whether the market action is part of a volatile bottoming process, our base case, or whether the decline could materially undercut SPX 3,854, triggering a capitulation trade,” notes the Evercore team, led by Julian Emanuel.

Offering their view of what’s been happening with this selloff, Emanuel and the team argue that markets have been caught up in Fed “misdirection,” rallying despite hawkish remarks from Chair Jerome Powell, then giving it all back a day later, echoing what happened after the early-May Fed meeting.

What’s key here is not whether markets understand the Fed’s intent, but “whether a recession in 2022-23 is avoidable in combating generationally elevated inflation, with the only experience previously being the Volcker Fed tightening (1971-81) to the point where multiple recessions were an inevitability.”

Emanuel and the team don’t think the Fed needs to precipitate a recession, but say stocks are behaving like it does.

“The distinction is critical. The last three non-Recession Bear Markets declined on average -21.3% — 2018 a ‘V’ bottom, 2011 and 1998 a ‘W’ — though none registered as an ‘official’ Bear. The last three Recession Bear Markets (2020, 2007-09, 2000-02) declined on average -47.9%,” says Evercore.

Panicky investors, notably on the retail side (they’ve been blamed before), should calm down soonish, it says.

Read: A larger share of younger investors say they’re not afraid to buy the dip in the pursuit of long-term gains — but there’s one big caveat

“We continue to expect the Public (whose job prospects remain robust and
balance sheets healthy) liquidating its Margin Debt to yield to the contrary signals/Misdirection of depressed sentiment and defensive professional positioning, stabilizing stocks in the days ahead,” say the strategists.

The buzz

Cisco Systems
CSCO
is on track to open at its weakest since late 2020 as China’s COVID-19 lockdowns battered its outlook.

After Walmart
WMT
and Target
TGT
downbeat results this week, Kohl’s
KSS
is down on weak earnings and slashed forecasts, a day after two executives left. Bed Bath & Beyond
BBBY
stock also down on weak guidance from late Wednesday.

Read: Wednesday’s worst-performing stocks mostly come from this one sector that has investors really worried

Once a top-rated hedge fund, Melvin Capital, is closing its doors.

The latest weekly jobless claims report showed a rise of 21,000, while the Philly Fed manufacturing report tumbled sharply to 2.6 in May from 17.6 in prior month. Existing home sales and leading indicators are still to come.

A case of monkey pox has been identified in Massachusetts, with officials probing links to the rare disease from a spate of outbreaks in Europe.

The markets

Stock futures
ES00

NQ00
are pointing to 1%-plus losses, with Dow futures
YM00
down over 300 points, and bond yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
tumbling. Oil
CL00
is down 3% , with the dollar
DXY,
and the whole crypto space
BTCUSD
also weaker. Gold
GC00
is up over $20.

The tickers

These were the most-searched tickers on MarketWatch as of 6 a.m. Eastern Time:

Ticker

Security name

TSLA Tesla

GME GameStop

AMC AMC Entertainment

AAPL Apple

NIO NIO

AMZN Amazon

TWTR Twitter

Kohl’s

BBIG Vinco Ventures

AMD Advanced Micro Devices

The chart

Michael Kramer, founder of Mott Capital Markets, is keeping an eye on one big name for Thursday — Apple
AAPL
— and advises investors do the same.

“If this stock breaks support at $139, it’s probably lights out for the entire stock market. That would create a lower low for Apple, a breach of support, and set up a drop to around $123. I don’t see how the entire market doesn’t follow Apple lower at that point,” said Kramer.


Mott Capital

Random reads

A rural Japanese town’s COVID-19 relief money was mistakenly sent to a guy who gambled it all away.

Former President George W. Bush made a rather large Freudian slip.

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