Goldman Sachs trader: The most painful but possible scenario is a "three-year bear market for US stocks" replaying the "2001-2003" script.

The financial markets are constantly changing, and investors' moods fluctuate with them. Recently, top macro trader at Goldman Sachs, Paolo Schiavone, issued a warning: is this downturn over? He believes that the current market's vulnerability indicates that stock returns will continue to face challenges. Schiavone's views are not unfounded. Two weeks ago, the market showed some worrying signs. Despite the possibility of a short-term relief rebound, structural headwinds still exist, making it difficult for the stock market to sustain an uptrend. What is more alarming is that Schiavone believes the biggest risk is not a financial crisis, but a worse situation: a slow, agonizing bear market that could last for several years. Without a major credit event to force a market reset, the stock market could repeat the 2001-2003 scenario - economic momentum fades, weak stock market rebounds, multiple false bottoms, and continuous new lows. 01 No crisis, more pain: a long bear market ordeal Schiavone points out that without a clear financial crisis, the market will not experience rapid, intense selling, and will not be able to reset valuations through forced deleveraging. Instead, the market faces the risk of a slow, painful decline that could last for many years, similar to the aftermath of the bursting of the dot-com bubble: Bottom fishers will continue to be punished as profit growth slows and valuation multiples compress. Credit tightening (about 20%) usually heralds an economic recession, but in the current cycle, without a crisis, there is no moment of forced deleveraging to create a lasting bottom. Stock allocation starting point is high - as stocks disappoint, individual wealth may flow back to real estate, just as in 2003-2004. 02 Declining American exceptionalism, consumer pressure mounting The once glorious "American exceptionalism" is gradually fading, and American consumers are beginning to feel the pressure: Consumer confidence is declining, reducing discretionary spending. Inflation in essentials (food, energy, housing) continues to exist, making it difficult for the Federal Reserve to make a decisive turn. Global capital is withdrawing from the US, tightening domestic liquidity, and increasing volatility. 03 Macro volatility and policy uncertainty exacerbate market turmoil Multiple factors are intertwined, leading to soaring market volatility: Geopolitical risks (Russia-Ukraine conflict), fiscal policy changes (Europe increasing defense spending), and US tariff threats increase uncertainty, leading to interest rate fluctuations. European interest rate volatility has always lagged behind the US, but is now catching up, especially in the long end of the curve. Market expectations for a Fed rate cut are skewed - an accommodative cycle may need to be deeper by 20-50 basis points than currently expected. 04 Trading dynamics: forced liquidation and technical breakdown Hedge fund deleveraging has reached the highest levels since 2008, exacerbating liquidity-driven volatility. Systematic traders (CTAs) have been actively selling, but by next week, forced selling should start to ease. Key technical levels are collapsing, former support becoming resistance, increasing the risk of further decline. 05 Weak dollar and global capital rotation The dollar is replaying the 2017 pattern, weakening as policies shift to support rate cuts and currency softening. Europe and emerging markets will benefit from this, as US capital outflows present opportunities for these regions. With investors hedging currency uncertainty and political risks, gold is expected to rise. 06 Trading strategy: proceed with caution and grasp rotation In this market environment, Schiavone proposes some trading ideas: Go long on MDAX (German mid-cap stocks): lower front-end rates, massive fiscal stimulus, cheap energy, and the potential acceleration of the Ukraine peace agreement could all drive a rebound in German mid-cap stocks. Short bond alternatives (UB/WN Shorts): upcoming bond supply surge is expected to push down long-term assets, creating downside space for bond alternatives. Long Euro interest rate volatility (6m30y payer swaption, 3m10y straddle): rising fiscal and geopolitical uncertainties will push up European long-term interest rate volatility. Steepening of the Euro interest rate curve (buy 2-year 2s30s, sell German ASW boxes): the market underestimates the impact of European fiscal policy changes, which should push up long-term rates. Short Russell 2000 / long Nasdaq: small caps are still highly sensitive to tightening financial conditions, while large tech stocks have better earnings performance (e.g., Broadcom's strong performance). Long gold, short DXY (weak dollar strategy): Trump's policy stance leans towards a weaker dollar, supporting an increase in gold - especially if the dollar continues its 2017-style downtrend. Conclusion: patience, tactics, and transformation Schiavone concludes that the most painful and likely scenario is a three-year bear market - not a severe crisis, but a slow decline without a clear reset moment. American consumers are weakening, inflation persists, global capital rotation is accelerating, all of which disrupt stock market stability. The market remains fragile - while a short-term relief rebound may occur, without fundamental catalysts, the rebound will lack sustainability. Technical breakdowns and forced liquidation by hedge funds make price trends unpredictable, increasing volatility risks. Trade cautiously, focus on volatility, and prioritize capital rotation themes over broad stock exposure. This environment requires patience, tactical positioning, and an understanding that this is not a bottom-fishing opportunity, but a shift that needs to be dealt with carefully.