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Taking Stock - Was That It?

Date: 07 July 2023

From a few weeks ago: “I continue to believe that the path for inflation is the number one question for the markets right now. If (when?) inflation shows signs of abating, that could be the cue for markets to stage a recovery. Maybe central banks will ease up on the hawkish rhetoric. Or company earnings this time around will prove to be better than expected. Who knows what the catalyst will be, or if we even need one?”

We might have just got our catalyst. Earlier this month a lower than expected inflation print in the US triggered a big intra-day up move for markets – particularly in the States. The US benchmark index was up by 5.5% on the day, which although undoubtedly a historically chunky move, does not quite provide a new entry into the top ten single up days since 1969.

Date % Change
13/10/2008 11.68%
28/10/2008 10.58%
24/03/2020 9.40%
13/03/2020 9.10%
29/05/1970 9.03%
21/10/1987 8.99%
06/04/2020 7.12%
23/03/2009 6.97%
13/11/2008 6.92%
24/11/2008 6.49%

Source: Refinitiv Datastream
Index: MSCI USA Index, USD returns

Leading the rally were the names that have been beaten up the most so far this year, namely high growth technology stocks. This inflation print seemingly allows some market participants to look forward to a world where the war against inflation is won, and where every meeting of the Federal Reserve is not accompanied by yet more increases in interest rates.

Of course one month’s data does not make a trend, and it is worth pointing out that during previous inflationary cycles (particularly during the late 70s into the early 80s) the inflation number moved around a lot month to month. So, there is a decent chance that a higher than expected print will land in the coming months. We are not necessarily out of the woods just yet.

It’s also worth mentioning that the reason that inflation is seemingly starting to cool is because rising interest rates are slowing economic activity. An economic slowdown or recession is very unlikely to be fully showing up in company earnings just yet. However, it would seem that given the choice between continuing out of control inflation, and a slowdown which results in a temporary hit to company earnings, markets seem to prefer the latter.

The net result of the recent upward moves for equities is that US markets are, at the time of writing, up 10.7% off their year-to-date lows which we saw on 12th October. While I have been enjoying a week away in Seville, our in-house data whizz Billy Ewins looked at how this current move compares to previous “bear market rallies” (an upward move for stocks which fails, and eventually leads to new lows). The previous eight largest failed rallies during bear markets (going back to 1969) are below:

Date Length of bear market rally (days) US equity index return (%, USD)
20/11/2008 47 24.9%
23/07/2002 30 21.0%
04/04/2001 47 18.8%
16/06/2002 61 17.9%
25/09/1981 66 11.7%
10/03/2008 70 12.5%
08/03/1982 61 10.7%
11/02/1974 32 10.1%

Source: Refinitiv Datastream
Index: MSCI USA Index, USD returns

So, although recent progress is very welcome, there is more than enough historical precedent which tells us that this move could break down and we could see new lows. Indeed, the rally we saw in June this year did just that - and that failure came after a bigger upwards move than the one we have seen so far this time around. I do not point this out because I have become all “doom and gloom” on holiday (although it did rain a bit, and my Spanish isn’t up to much), but to remind ourselves that it could get dicey again and it is important to be prepared for that mentally. Bear markets exist to inflict maximum pain on investors. Just when you think it is over, they pull you back in. Hope gives way to hopelessness, until the only people that are left are the ones who truly deserve the outsized returns that equity markets have generated over generations.

If you believe in capitalism, then the conclusion that you have to reach is that the one thing that bear markets all have in common is that they end. If the 12th of October is to be the bottom for this cycle, it would be apt given that this was the date that the highest US inflation print recorded in forty years was announced.

I have had one or two questions from readers as to why I prefer to refer to US market data, and mainly to US economic numbers rather than focussing on the UK. The simple answer is that the vast majority of my clients are globally diversified investors. The UK represents a very low proportion of the overall global stock market index – around 4% at the moment, while the US sits at a shade over 70%. The US market therefore just matters more for the performance of the global stock market, and I think we would all agree that the US has more of an impact on the global economy than the UK.

Have a great week.

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