REFILE-LIVE MARKETS-Things likely get worse before they can get better

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THINGS LIKELY GET WORSE BEFORE THEY CAN GET BETTER

With the S&P 500 index .SPX confirming a correction and the Federal Reserve meeting starting on Tuesday, Garrett Melson, portfolio strategist at Natixis Investment Managers, has some thoughts about what to expect.

In a phone call on Friday, Melson was not calling for the correction to become a bear. But he is expecting "a pretty choppy market" and further downside.

Melson estimates that the first 6-7% of the correction was valuation related unwinding, with the rest from growth worries.

"You could get to 15% when all is said and done," he added referring to the prospects for more equity declines.

"A lot of those fears are really focused on the tariff overhang and the resulting weight on confidence, both at the consumer level, the business leader level and then ultimately the investor level," said Melson.

But he says "the bigger story is that we were already seeing signs of growth slowing before all of this cloud of uncertainty really started to loom."

"Under the surface the economy is already cooling. Labor markets continue to cool. Income growth continues to slow down and that just suggests growth is going to continue to slow even in the absence of all the uncertainty from tariffs," he said.

The market is "in a little bit of a limbo" without a Fed put, where a Federal Reserve rate cut would help equities, or without a Trump put, which is the idea that the U.S. President would avoid, or reverse policies that hurt the market.

Part of the recent selloff was investors loss of hope for a so-called Trump put since he seemed to imply recently that tariffs could cause a recession.

"What ultimately short circuits that negative feedback loop is going to have to come from a policy response," he said.

Markets are really struggling right now regarding the Trump put, "it certainly seems like the strike price is a lot lower than where investors had hoped."

Melson does expect a Fed pivot, but cautions that patience may be needed.

"It's really going take a more material slowing in the labor market data and growth data until the Fed actually pivots. I wouldn't be surprised to see a little bit of that process, the balance of risks starting to shift back towards the labor side of the mandate at the upcoming meeting," he said.

But the Fed still must manage inflation vs tariffs.

"The greater risk is that the Fed disappoints in terms of how much they shift," Melson said.

"We're still looking at potentially June as that point where they really start to pivot."

(Sinéad Carew)

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