Bet a trillion dollars on falling prices

The stock market rally of the past few weeks has surprised many observers. In view of high inflation, the tense economic situation and rising interest rates, many professional investors had already expected a slump in share prices at the beginning of the year.

But it turned out quite differently. Even the bankruptcy of the Silicon Valley Bank and the problems at Credit Suisse were only able to shake confidence in the market for a short time. The Nasdaq technology stock exchange increased by 16 percent in January, and the S&P 500 index by eight percent.

But the steep rise could be over now if you believe the forecasts of leading analysts. So explained Mike Wilsontop strategist at the US investment bank Morgan Stanley, he expects a sale soon.

Prices could collapse by up to 20 percent, according to Wilson’s forecast – which he has, however, expressed several times in recent weeks. Always followed by further price increases.

But Wilson is not alone in his opinion. Jean Boivin and Wei Li from asset manager Blackrock predict massive profit slumps for the past first quarter. And that’s just the beginning.

While the markets are currently celebrating every missing or lower-than-expected rate hike by the US Federal Reserve, Wilson sees a problem in the weaker inflation data that caused this.

Falling inflation, according to Wilson, is a sign of weakening demand. Inflation is currently the only support for positive sales developments for many companies. If inflation continues to fall sharply, a decline in corporate profits can also be expected for several months.

It is unclear whether all market observers and analysts share Wilson’s assessment. However, the mood seems to have changed recently – at least among professional investors. According to an analysis by S3 Partners, new short positions worth $44.4 billion were built up in March 2023 alone.

Overall, the volume of bets on a price drop is said to amount to one trillion dollars. Or, like that Handelsblatt summarizes: “Nearly all of Wall Street appears to be preparing for a possible crash.”

It is not certain whether he will come. But the force with which the short sellers have positioned themselves is remarkable. Especially since they got bloody noses at the beginning of the year.

In January 2023, they had to liquidate their short positions in view of the price rally, which surprised them. They lost a lot of money in the process – according to S3 Partners $90 billion.

And: Because the short sellers have to buy back shares more expensively when closing the short positions, they also fueled the upward trend on the stock exchanges – especially for tech stocks.

In any case, the risk is currently high. At least at the beginning of the current reporting season, there is little to suggest that companies will have to report excessively large declines in profits or even losses. Accordingly, the short sellers could fall flat on their faces again.