US Stocks and Treasuries Fall as Oil Pushes Higher; Iran Refuses to Soften Demands

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Paul Sweeney (0:27)

Lori Calvasina, she covers this stuff for RBC Capital Markets. She's head of US Equity Strategy.

It's been a good year so far, Lori, for stock market indexes. How do you think about the fourth quarter setup?

Lori Calvasina (0:41)

We're not trying to make a call on December 31st per se, but we have said that we think risk of a 5-10% drawdown has risen.

In our weekly today, we also said, that's still our base case 5-10%, but every little bit you add here on the bond yield is pulling up a tier 2 risk. I forget if it was last week or the week before, but we put out a piece. We've had various things we're worried about, but we homed in on the hiking cycle last week. It was really fascinating because we went back and we looked at all the liftoff since the mid 1990s. We kicked out 2022 because that one was just longer and deeper and very different than the others. Otherwise, the median drawdown that you saw at the beginning of the hiking cycles was about 9.6 percent, and they ranged from about 8 percent to about 14 percent. So you do tend to see some turbulence around liftoff, and we haven't really gotten that yet. We had a sideways summer for the most part, but we think the risks are piling on.

Jess Menton (1:34)

I do get your notes that you sent out to clients. So I saw how you recently kept that 12-month price target at $81.50, and then you talked about the four tiers of fear framework, and you mentioned that briefly about the potential 5 to 10 percent drawdown. Walk us through those tiers.

Lori Calvasina (1:49)

Yeah, so this was, you know, this is honestly, it's just a list of drawdowns based on my kind of lived experience in financial markets. I started in 2000, I joked that I got my job offer in March of 2000, right off, right at the peak. So I didn't see the melt up, but I did see the melt down. And, you know, so we have tier one garden variety 5 to 10 percent drawdown, that would take you to $7,7400 on the S&P. Won't feel good if I'm right on this, but the reality is it's pretty ordinary to get these kinds of drawdowns. Post-GFC, which is when I've been sort of in the hot seat, you know, as a lead senior strategist, really what we've noticed is that if you kind of fall below 10, you're going to gap down to like 14 And so we've had five of these distinct what we call growth scares, where you lose 14 to 20 percent. That's tier two. Really, it's fears of a recession or something new and crazy on the scene, and people are afraid things are spiraling out of control. But you don't have a recession. It's kind of a near miss. Tier three, recession pricing, you lose a quarter to a third of the market value. I joke with tier four, we don't talk about those. Tech bubble meltdown, GFC, one was down 40, one was down 60 We approximate you lose half your value.

I think the way we compare it is a shopping mall elevator.

You go down one level and then you reassess. So around the Iran war, frankly, back in March, we were having a lot of conversations with headphones and saying, if you really don't think that there's serious risk that we're going to have a recession and the things spiraling out of control, et cetera, you probably want to buy the market around 10% down. If you think there is a serious risk of a recession brewing, there's going to be another gap down. That's how we try to use it, is reassessing at each of those levels.

Jess Menton (3:27)

So typically in a midterm year, you'd see the drawdown usually average historically the last few decades, like 18%.

And then the drawdown we saw back in March in the S&P was as much as 9%. So mathematically, does that just, in your view, leave us room to have another drawdown by year end?

Lori Calvasina (3:42)

And like what I will tell you is, if you go back and you look at the history around midterms, and I have this chart in my deck, I update it every week, you can sort of see the pressure in the summer, you bought them in October, you rally back.