Powell admits to recession… The US stock market may be at the beginning of a downtrend

The chairman of the US Federal Reserve (Fed), dubbed “the president of the world economy,” has publicly acknowledged the immigration recession. This added to the possibility of further declines in the US stock market.

Most of the listed stocks have already turned blue, but some analysts say that the current index level is only at the beginning of a downtrend based on past data. Ultimately, this downward trend is expected to continue until the US monetary policy stance changes.

Seohak ant ‘one pick’ Tesla (TSLA) has even lowered its target price amid a series of bad news. This is due to the fact that the expected rate of return on stocks, a risky asset, has risen due to the recent rise in government bond yields. For the expected return to rise, the price at which investors buy the stock, that is, the stock price, must fall.

Powell’s three major indices fall… “Rebound agent” as the keyline for interest rate hike

The New York Stock Exchange this week was closed for a day as a substitute holiday for Juneteen’s Day (Slavery Emancipation Day), and the next day, the 21st (local time), produced a huge rebound. The three major New York indices, the Dow Jones Industrial Average (2.15%), the S&P 500 Index (2.45%), and the Nasdaq Index (2.51%), all rose by 2%.

But it was only one day. This is because Federal Reserve Chairman Jerome Powell admitted to the U.S. Senate Banking Committee on the 22nd that while he expected a continued rate hike to be appropriate, he acknowledged that it was “certainly likely” to the point that a continued rate hike could plunge the economy into a recession. The next day, the three major New York indices fell again all at once.

In particular, in the case of the rebound on the 23rd, it is evaluated that it is a temporary phenomenon due to the sharp drop in the yield of the 10-year U.S. Treasury bond amid the possibility of an economic downturn. Todd Jones, chief investment officer at Gratus Capital, said: “It reminds me of the temporary rebound that follows a very oversold environment.

Even though the US stock market is walking on thin ice, an analysis came out this week that it is still in the early stages of a downtrend. The main point is that unless the Fed’s stance of ‘continuous rate hike’ changes, the rebound will be far away.

The Wall Street Journal reported on the 20th that the S&P 500 has lost at least 15% or more since 1950, 11 of which reached a bottom when the Fed turned back to easing monetary policy. Considering historical data, further declines in the index are inevitable under the current Fed rate hike stance.

Meanwhile, next week, the personal consumption expenditure (PCE) price index for May, the most important price index considered by the US Federal Reserve, is released. The market forecast is for a 4.9% YoY increase and 0.3% MoM increase. In this case, it will decline once again following the 6.6% increase in March and 6.3% in April, when the first slowdown in growth since November last year was confirmed. The direction of the PCE in May is noteworthy as it is a figure that the Fed uses as an inflation indicator when determining future monetary policy.

Tesla recovered $700, but… “It is difficult to make up for the production disruption.”

Although Tesla recovered to the $700 level this week, its 2Q earnings are expected to be sluggish due to the shutdown of its Shanghai factory in China.

Previously, 80,000 units were estimated to have production setbacks due to the shutdown of the Shanghai factory in March and April. Accordingly, the market expects a decrease in the number of units sold in the second quarter inevitably. In addition, Reuters and Bloomberg News recently reported that the Shanghai plant will be shut down for two weeks from the 1st of next month. However, this suspension is for facility upgrades, not COVID-19.

Lim Eun-young, a researcher at Samsung Securities, said, “We are currently operating in three shifts, but it is difficult to make up for the production disruption of the past two months. %, down 29.9%, to $18 billion or $2.53 billion,” he said. She also predicted that “the stock price will be sluggish until the end of next month, when the second quarter earnings are announced.”

Meanwhile, Morgan Stanley lowered its target price for Tesla. It will be priced from $1,300 per share to $1200 per share. However, this is due to Tesla’s weighted average cost of capital (WACC) rising from 8.5% to 9.0%, regardless of how many cars Tesla is selling. WACC is the cost used by a company to raise business funds by type, such as common stock, preferred stock, and debt.

Morgan Stanley analyst Adam Jonas said the rise in WACC is almost 100% the reason Tesla has cut its target price to $1200, as the risk-free asset, Treasury bonds, has recently yielded high returns. “Tesla’s stock price should reflect both share price volatility and Treasury yields,” he said. That is, stock yields should be as high as Treasury yields. In other words, the ‘current stock price’, the price at which investors buy stocks, should go down.