Bear market rallies are not draped in a banner saying “this is a bear market rally, please disregard it”.
Instead, these fake moments of levity in otherwise gloomy stock market conditions are often hard to distinguish from the real thing.
Over the summer, some investors learned the hard way (again) that this can be painful, when they grabbed the wrong end of the stick from Federal Reserve Chairman Jay Powell’s comments and ran with.
Global stocks surged in July on the slightest hint from Powell that the Fed might slow its rate hikes. Toss in some short-term funds that are pulling back on negative bets and all of a sudden we had a nearly 8% rally in the MSCI Global Index that started to look like a serious positive turn in the mood of a painful, terrible and bad year for money managers. It turned out to be a fleeting summer adventure. The Fed hadn’t changed its mind after all, and the beatings will continue until morale improves.
Now, with some grim predictability (after all, markets never go up or down in a straight line), we’re back to starting over. Global equities posted a pretty decent 7% rise in October. But this time, it really felt like a half-hearted effort. Even those jumping on board thought it was a bit silly.
Michael Wilson, chief US equity strategist at Morgan Stanley and one of the most prominent bears on the street, was one of them. Wilson believes the S&P 500 will drop to 3,000 in a recession, about 20% below our current level, as part of his “fire and ice” theme. (First, the fire from soaring bond yields brings down speculative fervor in stocks, then poor corporate earnings in a declining economy provide the ice.)
“Two weeks ago we became tactically bullish on US equities,” he wrote. “Some investors felt this call came from left field given our entrenched bearish view.” But, he said, it was mostly a tactical decision “based almost entirely on technicalities rather than fundamentals, which don’t support many stock prices.”
The rationale: The “quirks” in the chart patterns were “too big to ignore” – those who believe in the predictive power of long-term moving average prices and the like had a real treat in mid-October; the downtrend had become too much of a consensus trade; and “the seeds have been sown for a sharp decline” in inflation next year. “We realize that going against its fundamental short-term vision can be dangerous, and possibly wrong, but it’s part of our job,” he said.
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He is right. If you can’t beat them, join them, at least temporarily. Trevor Greetham, head of multi-asset at Royal London Asset Management, has also jumped into equities, but doesn’t expect to stay there. He says he unwound his negative equity bets and found himself uncharacteristically “slightly long” on the asset class. But he adds rather curtly, “I expect to be underweight again.”
So what drove the ascension? The answer is somewhat depressing, given the adage that the definition of insanity is doing the same thing over and over and expecting different results. There appears to have been expectations for a much-vaunted so-called pivot from the Fed, in which it cools, abandons or outright reverses its tough rate hikes. The pivot hunt was this year the equivalent of the Big Foot hunt. Every time pundits think they’ve found the elusive beast, it turns out to be a central banker in a suit saying “but inflation.”
In fairness, some of the smaller central banks have wobbled a little lately. The Bank of Canada, for example, opted for a surprisingly low interest rate hike of half a point at the end of October. This has helped fuel speculation that the Fed may also exercise restraint, especially as economists and asset managers fret over where the next big market crash will come from in this new era of monetary scarcity. , after the spectacular collapse of the United Kingdom at the end of September.
Again with grim predictability, the Fed spoiled the party on Wednesday. It raised its benchmark interest rate again by 0.75 percentage points, as expected, and Powell suggested further rate hikes could be smaller. But he also pulled the scale from under rising stocks by saying rates would likely end up in a higher place at the end of this process than previously thought.
Either way, those hoping the lesser-spotted pivot might be the magic trick to lift stocks could easily be disappointed. Yes, rising rates and rising bond yields hurt stocks. A lot. But if rates fall to reflect a recession, does that necessarily mean equities recover?
In addition, there is the small problem of the ever galloping inflation. “We’re not there yet,” said Alexandra Morris, chief investment officer at Skagen Funds in Norway. “We don’t have a solid base, and we won’t until we have hard evidence of falling inflation. Powell is not going to stop.
Asset managers have enormous financial firepower hidden in the form of cash that they are eager to deploy. This means that when the real recovery begins, it will be dramatic and long-lasting. October seems to have provided another mirage. It’s also worth exercising extreme caution next time.
katie.martin@ft.com
#Illusory #Allure #Bear #Rallies