Enjoy the bear market rally while it lasts
Investors seem to think that a weaker US economy will cool inflation and see the Fed relent on interest rate rises. But that optimism may be misplaced, with July’s stockmarket gains looking very much like a bear-market rally.
Recession? What recession? The US economy shrank at an annualised pace of 0.9% between April and June, its second successive quarterly contraction. In many countries that would meet the definition of a recession, but with unemployment close to a 50-year low and two vacancies for every jobseeker in May, the White House has rejected the label. “That doesn’t sound like a recession to me,” says president Joe Biden.
“The official designation is determined by eight economists” at the National Bureau of Economic Research, who also look at measures of jobs growth, income and spending to make a recession call, say Nicole Goodkind and Tal Yellin for CNN. They don’t think this slowdown qualifies.
Beyond the technical arguments, “what’s clear to everyone is the economy is slowing, prices are rising at their fastest pace in decades, and the housing market has started cooling as the Fed raises interest rates aggressively”, says David Gura on National Public Radio. Around 65% of US voters think the country is already in recession.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Investors are too bullish
That hasn’t dampened investors’ spirits, however. The S&P 500 plunged 21% in the first six months of the year, but rallied 9.1% in July for its best monthly showing since November 2020, say Kate Duguid and Naomi Rovnick in the Financial Times. The tech-heavy Nasdaq Composite index gained 12.3%. Last week the US Federal Reserve hiked interest rates another three-quarters of a percentage point to a range between 2.25% and 2.5%. Yet investors increasingly think that a weaker economy will cool inflation and see the Fed relent fairly soon, says John Authers on Bloomberg. “That’s an unlikely scenario” that suggests a misplaced confidence in the Fed’s ability to manage the inflationary storm without reducing corporate earnings. July’s gains look like a bear-market rally, a moment when “it appears that all the selling is over and that it’s safe to take risks once more”, only for markets subsequently to plunge once again.
Bear-market rallies are not uncommon, says Robert Armstrong in the Financial Times. “I count four or possibly five in the 2007-2009 downturn.” There were also “three big ones, all of around 20%, interspersed within the 2000-2003 crash”. While this rally principally reflects “a softening of inflation” and interest-rate expectations, investors also appear to think that the US is heading for “either a shallow recession or no recession at all next year”.
Wall Street is being unduly optimistic, says Russ Mould of AJ Bell. Analysts are still forecasting increases for overall S&P 500 earnings in 2022 and 2023. That looks a “stretch” given soaring inflation and “sagging growth”. Note that “US corporate profits stand at record highs not just in margin and absolute dollar terms, but also as a percentage of GDP”, leaving limited room for further progress. While US valuations have come down this year, they still look expensive on the crucial cyclically adjusted price/earnings (CAPE) gauge. “Any time the CAPE ratio has stood at the current level, subsequent ten-year compound returns from US equities have invariably been negative.”
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Alex Rankine is Moneyweek's markets editor
-
8 of the best properties for sale with smallholdings
Eight of the best properties for sale with smallholdings – from a 17th-century farmhouse in the Deben Valley, Suffolk, to a property set in 36 acres on the slopes of the Preseli Hills, Pembrokeshire
By Natasha Langan Published
-
US election – is the Trump Trade back?
The US election is around the corner. How does Trump influence US markets?
By Alex Rankine Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated