US stocks appear to have entered the ‹final stages› of a bear market. But the final low for the S&P 500 is seen around the 3000 to 3400 point level, which would represent a drop of another 16 per cent from last week’s close. Current conditions are such that financial accidents can easily happen, some market watchers warn.
Michael J. Wilson, head of US equity strategy at investment bank Morgan Stanley, told Bloomberg TV on Wednesday that the bottom of the market has not yet been reached, especially as liquidity continues to decline. He noted that the change in the money supply in dollars (annualised) is negative for the first time since 2015 in the US as well as in China, Japan and the eurozone, which is an indicator for a global manufacturing recession.
“That tightness is unsustainable, and the problem can be solved by the Fed,” Wilson said. He was referring to the central bankers› intention to raise interest rates further. Liquidity is in the danger zone, he said, referring to the «M2», the measure of money supply that includes cash, overnight deposits and easily convertible «near money» or near-money.
Declining liquidity
Declining liquidity is almost entirely correlated with falling stock prices, as it has been the opposite in recent years: increasing liquidity, thanks to central bank policy, was followed by rising stock prices. But investors currently dare not buy the dip, partly because of tougher economic conditions, partly because of declining liquidity.
Or, as an analyst at Swissquote Bank wrote yesterday: “In fact, a 3% jump in the S&P500 is almost as disquieting as a 3% fall, because it is sign of high volatility. And high volatility is a characteristic of bear market. The good news is, the VIX index eased below 30 yesterday. The bad news is, it’s still very close to the 30 level.”
Since January, virtually all listed assets worldwide have been heading for multi-year lows. September, usually the worst stock market month of the year, did not disappoint in that respect this year either. The S&P 500 lost more than 9 per cent, breaking two records. It was both the worst month since the March 2020 massacre and the worst September in 20 years.
Despite the malaise in the stock market, the well-known adage «buy when the blood is running through the streets» is being ignored by investors for now. That is a gift for the contrarian investor with cash behind him, especially as several indicators point to a bottom in the market.
Is bad news good news?
According to Han Dieperink, CIO at Auréus, this is the time when financial accidents happen. ‹This is bad news, of course, but at the same time good news for investors because banks are forced to act, read: cut interest rates.›
Dieperink: “Since 2018, the Fed has been wrong on a regular basis. Now the bank wants to continue until the 2 per cent inflation target is reached, but this is more a reaction to the misjudgement that inflation would be temporary. So the likelihood increases that if inflation falls sharply, the Fed will again have to acknowledge that it is wrong and thus pivot in monetary policy.”
“The market fears inflation and/or a deep recession, or even a combination of both (stagflation). In reality, inflation rates are falling in the US and in Europe, this year’s energy prices are impossible to beat next year.”
The time of year is favourable
However, there are more arguments to believe that the stock market is close to a bottom. According to Dieperink, the time of year is relatively favourable. October is typically a much better month than September, he argues. October does mark the month when there have been big crashes, but usually that happens when the months before have been just right. If the months before are bad, as is the case this year, Dieperink says October can be a good stock market month.
“Furthermore, we are in the second year of the presidential cycle, which is the worst year, from the mid-terms onwards, and in the third year things traditionally improve strongly,” he added.
Profit estimates will continue to fall, according to Dhem, “but by the most predicted recession ever”. He said some of those earnings declines have already been factored into share prices, although analysts remain remarkably positive for a long time.
“It may still be too thin to go full in shares, but to me it seems sufficient for a neutral weighting,” Dieperink concluded.
‘Timing is impossible. Just buy’
Hans Betlem, CIO of independent asset manager IBS Capital Allies, thinks that although it is sometimes psychologically difficult, investors should always buy a dip when money is available. The reason is simple: the expected return is higher than when the stock market was at its peak.
«The bottom of the stock market always takes place at a time when the economic news is still bad. Timing is impossible. That is why ‘dollar cost averaging’, the ongoing buying of assets regardless of market value, is always a good idea,” Betlem said.
“Just keep buying,” Betlem argued on the 278th day of 2022. The average duration of a falling S&P 500 lasts 289 days; this year’s decline started in early January.
This article originally appeared in Dutch on InvestmentOfficer.nl.