How Much Will Markets Fall? Top Investors See No Bottom Yet

UBS's Orcel: Markets Have Lost Confidence
  • Gundlach, Guggenheim's Minerd say S&P 500 to drop further
  • Stock selloff isn't warranted by fundamentals, Herro says

Investment managers are warning that markets probably have further to fall as China’s growth slows, oil prices plunge and central bankers lack tools to prop up economies.

The Standard & Poor’s 500 Index will drop another 10 percent to 1,650 and oil could fall as low as $20 a barrel as investors flee for safety, according to Scott Minerd, chief investment officer of Guggenheim Partners. Jeffrey Rottinghaus, whose T. Rowe Price mutual fund beat 99 percent of rivals over the past year, said stock prices could fall another 10 percent as the U.S. economy slips into a mild recession.

"I expect a protracted decline in the S&P 500," Jeffrey Gundlach, co-founder of DoubleLine Capital, said in an e-mailed response to questions. "Investors should sell the bounce-back rally which could come at any time."

The S&P 500 and Dow Jones Industrial Average are down about 8 percent for the year, and both tumbled more than 3.5 percent on Wednesday before recovering. The S&P 500 was up about 1.4 percent to 1,886.07 at 12:29 p.m. in New York, while the Dow rose 1.5 percent. Oil rose 5.5 percent to $29.92.

Rottinghaus, manager of the $203 million T. Rowe Price U.S. Large-Cap Core Fund, said "industrials and commodities have been in a recession for at least six months" in the U.S. “What we are trying to figure out is how much that bleeds into the consumer side of the economy," he said in an interview.

Waiting for a Catalyst

Russ Koesterich, global chief investment strategist at BlackRock Inc., said there needs to be a fundamental catalyst to signal a market bottom, whether it comes from corporate earnings, economic data or an improvement in China.

"You need to have some stabilization of fundamentals to give people conviction this has gone too far," Koesterich, whose firm is the world’s largest money manager, said in an interview. "Certainly you are getting closer to capitulation. The magnitude of the drop suggests that."

Hedge fund manager Ray Dalio said global markets face risks to the downside as economies near the end of a long-term debt cycle. The Federal Reserve’s next move will be toward quantitative easing, rather than monetary tightening, the founder of Bridgewater Associates said in an interview with CNBC from the World Economic Forum in Davos. That won’t be easy, because rates are already so low, he said.

Risks to Downside

“When you hit zero, you can’t lower interest rates anymore,” Dalio said, according to a transcript of the interview. “That end of the long-term debt cycle is the issue that means that the risks are asymmetric on the downside because risks are comparatively high at the same time there’s not an ability to ease.”

The rout in global stocks is being fueled by investors seeking to reduce leverage as central banks run out of options to prop up economies, according to Janus Capital Group Inc.’s Bill Gross.

“Real economies are being levered with QEs and negative interest rates to little effect,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail responding to questions from Bloomberg. “Markets sense this lack of growth potential and observe recessions beginning in major emerging-market economies.”

While overseas economies are wobbling, the U.S. remains an island of stability, according to money managers such as Omar Aguilar, chief investment officer for equities at Charles Schwab Corp.

A Stable Economy

"This is a financial crisis and not an economic crisis," Aguilar said during a conference call. "The U.S. economy is stable."

Data on the housing market, unemployment and government spending still support U.S. gross domestic product growth, Aguilar said. Oil markets will rise later this year when supply drops in response to current low prices, according to Mihir Worah, co-manager of the $89.9 billion Pimco Total Return Fund.

“We continue to expect oil markets to balance in the second half of the year, and expect oil prices to move higher from current levels as a result,” Worah said in an e-mail. “While we aware of the risks, we still expect U.S. GDP growth to come in around 2 percent.”

David Herro, manager of the $24 billion Oakmark International Fund, said low energy prices should support consumer spending, the biggest part of the U.S. economy.

“I don’t think the drop in equity prices is at all warranted by economic fundamentals,” Herro wrote in an e-mail.

Mitchell Julis, co-founder of Canyon Capital Advisors, which has more than $20 billion in assets, said in an interview on Bloomberg <GO> that his Los Angeles-based hedge fund is sitting on 20 percent cash, a conservative stance for the firm, which is waiting for the right moment to start buying. While personal consumption hasn’t picked up quite yet, Julis said, his team is looking at the debt of retailers J. Crew Group, Inc. and Neiman Marcus Group Ltd.

Canyon avoided the bonds of energy companies last year, said Julis, and “it’s still too early.” He said eventually he would look toward larger companies like Exxon Mobil Corp., after the drop in oil has been priced into their securities.

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