Global Market Overview – November 2022
Bear market rally, dead cat bounce, market turnaround, it’s coming home… these are just a few of the phrases you wouldn’t have been able to miss in November.
But what is actually going on, and who is right? Some commentators will tell you that the bear market is reaching its end, but others will tell you that this is just an overreaction to some slightly positive data. Similarly, some pundits will tell you that football is indeed coming home, while others will tell England fans to get a grip and stop dreaming.
Markets as a whole performed pretty well over November. US inflation came in at 7.7% - just below expectations – leading to a wave of positive sentiment. Both stocks and bonds responded positively as the S&P ended the month 5.6% up.
There was also a good story in emerging markets as China’s Covid policy looked to ease a little, with a push for vaccination instead of lockdowns. Markets took this news very positively and emerging markets shot up by a massive 15% over the month. Dissecting this change is tough as the actual change in policy was marginal, but markets took it to be a sign of a momentum change in Chinese Covid policy.
These market moves represent a bear market rally – a short upturn in markets in the context of a broader bear market. But of course, if markets keep going up, then we’d just be in a bull market.
Typically, markets perform best just after a bear market ends. Despite bull markets lasting an average of 4.8 years, half of the returns are usually made in the first year of bull markets. So, as an investor, you don’t want to be late to the party… but you also don’t want to turn up to a party that has been cancelled. Bear market rallies are some of the hardest environments for investors – they lure people in, just in time for another dose of pain.
The bear market rally examples below show this pretty neatly:
1. 1929 DJIA – the BIG bear rally. The Dow Jones rebounded 48% from mid-November through to mid-April 1930 and then proceeded to fall 86% before actually hitting the bottom in 1932!
2. 2000-2001 Dot.com – the bear that rallied again, and again, and again. During the dot.com crash, the Nasdaq entered eight bear market rallies greater than 18%, none of which materialized into a bull market. The total peak to trough drawdown was 83%.
3. 2020 Covid 19 – blink and the rally is over. Between 20 February and 12 March, the S&P lost 20% before rising 9% on the 13 March. After this, the market continued to tank. The total peak-to-trough drawdown was 34%.
So, in conclusion, bear market rallies are a massive pain for investors to navigate. They can give us false hope, but they can also turn into highly lucrative bulls. The best course of action in these periods is to stay invested in a range of diversified positions, and focus on the economic fundamentals, rather than market movements.
Over the next twelve months, we think markets will generally move sideways with volatility. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:
• A global manufacturing downturn is unavoidable… but the service sector should be resilient
• Inflation will fall eventually… but the short-term outlook is less clear
• Central bankers are under pressure… so the interest rate outlook changes frequently
• Corporate profit margins have peaked… but most companies will keep growing earnings
And so, investors are starting to worry about what’s next for financial markets. The next economic data aren’t likely to stabilise until the end of 2022, so ‘sideways with volatility’ is the most likely scenario for the next few months.
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited