As the rout in the global stock markets deepened in the earlier half of 2022 (see Chart 1), bringing the markets into bear market territory, there was a nagging thought at the back of many minds: “Will there be a recession soon?”
However, that thought was replaced by a cautious optimism as equities rallied for the last 4 weeks in a row, with the S&P500 regaining about 17% from its recent low on 16th June.
Why was there a rebound in the stock market?
“Equities have rebounded thanks to better-than-expected corporate earnings.1” The rebound was due to inflation easing in July to 8.5% from 9.1% which led to expectations that the Fed would ease off on rate hikes.
However, “many traditional indicators of a market bottom are yet to be triggered—such as rising unemployment, the Federal Reserve starting to lower interest rates, a slowdown in profit estimates and a decline in the two-year Treasury Yield2.”
In fact, most of these indicators are in heading in the opposite direction of a market bottom, which probably goes to show that the market wasn’t experiencing a bottom.
And as the jobs report had been more than stellar, it is expected that the US Federal Reserve (Fed) would most probably raise its key interest rate for the fifth time this year at its next meeting on 20th-21st September.
So, how much would key interest rate increase, and why does it matter?
How much the increase would be is still up in the air.
“Monetary policymaking requires a fine balance. More than two-thirds of the recessions Americans have experienced since World War II were caused by an increase in interest rates that was too fast for the economy to handle, according to NPR3.”
The previous minutes from the Fed suggested that they might opt to lower the size of the increase to 50 basis points in September instead of 75 basis points. And bets in the financial markets on the size of the next move has swung between 50 and 75 basis points on reports alternately showing a stronger-than-expected labour market (see left arrow in Chart 2) and inflation below forecasts (see right arrow in Chart 2).
While the labour market seemed to be enjoying a boom, official figures released on 28th July showed that the US economy shrank for the second straight quarter, which was just days after the International Monetary Fund (IMF) forecasted a global recession. During the second quarter of 2022, growth had slowed to a 0.9% annualised rate.
With a slowing economy, it is highly probable that history will repeat itself – that the interest rates hikes will prove to be too much and too fast, and the economy goes into a recession.
This is coupled with inflation that is being fuelled by supply chain issues, higher commodities, energy and food costs – all of which aren’t going away soon.
What does this mean for the stock market, and how can you gain from this?
With a recession highly imminent, the stock market rally that we are seeing right now most probably will not last, and that this is a bull in a bear market, which means that the market has not yet turned the corner.
However, recessions and bear markets aren’t bad news for investors. As supposedly put by J.P. Morgan, "In bear markets, stocks return to their rightful owners."
It is best to apply the Dollar Cost Averaging (DCA) strategy during a bear market as you are buying further into the discounts every month. See more details on DCA here.
“Between April 1947 and April 2022, there had been 14 bear markets, ranging in length from one month to 2.6 years, and in severity from a 56.8% drop in the S&P 500 to a decline of 19.9%4”, and usually the deeper it drops, the higher the rebound. As bear markets usually last a very short duration of time (see dark blue columns in Chart 3), you wouldn’t want to miss it as an investor!
We will progressively increase our allocation to equities from the current 40% as the market
continually up its discount to us.
And it’s advisable to prepare your funds by putting them into your investment account as part of opportunity funding so we can help you leverage the opportunities in a timely manner.
As a wealth manager wisely mentioned, “It’s (during) these times that great fortunes are built, not bull markets. But you have to buy the right companies, you have to have an appetite for some pain and misery and you have to be patient1.”
Do look for your Unicorn Financial Consultant who would be able to draft a personalised plan and investment strategy, which could grant you a peace of mind when you know that your investment portfolio is well-positioned and taken care of, even in times of crisis.
Sources:
1.Reuters
2.Forbes
3.Time
4.Investopedia
5.Images: Schroders, Bloomberg, Investopedia
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