A shift in investor sentiment could mean a further 20% decline for US equity markets, according to the International Monetary Fund’s director of monetary and capital markets.
Research by the IMF found that rising interest rates and future earnings expectations were driving corporate valuations down in the current market downturn, Tobias Adrian told CNBC’s Geoff Cutmore at the 2022 annual meetings of the International Monetary Fund and the World Bank Group in Washington, D.C.
Sentiment and risk premiums have held up “pretty well” so far, leading to an “orderly tightening,” he said Tuesday.
Asked about a recent CNBC interview with Jamie Dimon, in which the CEO of JPMorgan said the S&P 500 could easily fall another 20%, Adrian said it was “definitely possible”.
The benchmark index fell by about 25% over the year.
The US Federal Reserve raised its interest rate to 3%-3.25%, the highest level since early 2008, in September, as it attempts to cool annual inflation from 8.3%. The latest US inflation figures are expected on Thursday.
“My belief is that what Jamie Dimon is referring to is that there could also be a shift in sentiment. And that would naturally add to economic activity,” Adrian said.
“Now, as for the 20%, it’s definitely possible. It’s not our baseline, but that’s something that is possible.”
Adrian added that the IMF didn’t have a specific figure for its baseline, but it was one where financial conditions are tightening further, economic activity is slowing and markets remain under pressure.
On Tuesday, the institution released its World Economic Outlook, in which it forecast that global growth will slow to 2.7% next year, 0.2 percentage points lower than its July forecast.
It also said 2023 would feel like a recession for millions of people around the world, with about a third of the global economy shrinking.
Crisis risks increased
Adrian told CNBC that despite recent volatility in areas such as UK government bonds, the IMF’s premise remained that global credit markets remain “in an orderly fashion” and would not turn into a full-blown crisis on the scale of a “Lehman moment.” .”
But, he added, there are many risks on the downside.
“[Financial stability risks] are very exalted. They are only higher in times of acute crisis, such as the 2008 crisis, the 2020 Covid crisis or the euro crisis,” he said.
“So yeah, we’re in a very, very stressed moment. We really hope we’ll avoid a systemic event, but the odds are definitely elevated at this point.”
Banks have much more capital and liquidity than during the 2008 crisis, when the banking system caused a lot of acute stress, he noted. the non-bank financial system could end up in the banking system, he warned.