In a very negative year for equities, the S&P 500 gained more than 11 per cent this month. The MSCI ACWI index gained almost 10 percent. Are we crawling out of the bear market, or has the rebound been exaggerated?
This year’s losses have been rapidly recouped in recent weeks. 88 per cent of shares in the S&P 500 are above their 50-day moving averages. A Dutch global macro strategist at Fidelity, Jurrien Timmer, noted earlier this week that the S&P 500 has recouped half of its losses from the high of 3 January to the low of 16 June.
The big question at the moment among investment strategists is whether we are in a bear market rally: a temporary, sharp rise in prices amid a longer-term bear market. «On a historical basis, if this rally advances much further, it will be hard to conclude that this is not a new bull market … If this is a bear-market rally, it likely has gone about as far as it will go,” Timmer wrote on his Twitter page.
So, on a historical basis, if this rally advances much further, it will be hard to conclude that this is not a new bull market. This is one of the few technical clues out there. If this is a bear-market rally, it likely has gone about as far as it will go. /END
— Jurrien Timmer (@TimmerFidelity) August 16, 2022
According to a blog posting by US-based Mark Hackett, head of investment research at Nationwide, the tug-of-war between bulls and bears creates confusion and leads to «directionless volatility».
Hopeless optimism
One explanation for the rally is inflation data. The lower-than-expected inflation figures in the United States and China have raised hopes of an early end to the global cycle of monetary tightening, a good sign for equities.
However, “this view, however, is hopelessly optimistic”, wrote Seema Shah, the London-based chief strategist of Principal Global Investors, in a website posting. She wrote that while there are signs that inflation has peaked in certain parts of the world, the idea that the global monetary tightening cycle will soon be over “is misplaced”.
US consumer price inflation fell from 9.1 per cent to 8.5 per cent in July, helped by the recent easing in energy prices. Nevertheless, the CPI (Consumer Price Index) will remain uncomfortably high, according to Shah.
“Peak inflation may be behind us, but CPI will remain uncomfortably high as sticky (slowly adjusting) shelter and services inflation continue to put upward pressure on prices. It will be some time before the Fed feels sufficiently comfortable enough to pause interest rates,” Shah wrote.
“With CPI (consumer price index) levels set to remain at uncomfortable levels for the foreseeable future, inflation mitigation remains key for investors.”
High in Germany still to come
The US is still facing uncomfortably high inflation and Europe’s inflation problem is “extraordinarily pressing”, Shah explained.
“The need to fight inflation has by no means disappeared,» she wrote.
“Unlike the US, Germany’s inflation peak is still ahead. Headline inflation rose from 8.2 per cent to 8.5 per cent in July and the relentless rise in natural gas prices will likely push inflation into double digits later this year.” According to Shah, even the looming eurozone recession cannot stop the ECB from raising interest rates further.
“Inflation will end up in wages”
“This is a bear market rally. I am starting to get extremely gloomy about the stock market. All the problems we had are still there, but the market hasn’t fallen any further,” said Corné van Zeijl, economist and investment strategist at Actiam, in a conversation with Investment Officer NL. “Indeed, the MSCI World gained as much as 22 per cent in the past month.”
“The reaction to the better than expected inflation figures has been extremely enthusiastic,” added Van Zeijil. “The market expects central banks to stop raising interest rates sooner, because inflation is responding sufficiently to the current interest rates. The market is forgetting that inflation is a seven-headed monster and all seven heads really need to be removed.”
According to Van Zeijl, we are only at the beginning of the economic weakening. He predicted that expected profits will decrease further and labour costs will increase. “Margins will therefore come under pressure and the same will apply to sales figures.”
“Together, this will drive down expected profits, and this will eventually be reflected in the share prices. In my opinion, this is not yet visible, because many analysts underestimate the wage increases. Wages are an important cost component. These wage increases are not there yet, but the current inflation will inevitably end up in wages in due course.”