Are we “past the worst” of the Great Pandemic sharemarket collapse of 2020 and the 20% decline of 2022, and ready to commence market recovery? My opinion (and others may validly say that it is too early to call) is a qualified “Yes”.
In 2022, the S&P 500 fell 19.4% over the calendar year: it looked to have bottomed at 3666 in mid-June, when sentiment was exceptionally bearish. But it was not the bottom. It fell to a new low last October, which looked like a successful retest of the June low, and the S&P 500 is up 12% since then (but still down 16% from the record high on 3 January 2022). The S&P 500 now sits at 3999, just above its 200-day moving average.
The last market rallies failed when the US Federal Reserve (Fed) turned hawkish in the face of rising inflation. They are still hawkish, but CPI data shows inflation has probably peaked, and the US yield curve suggests we are approaching the terminal rate for the Fed funds rate (presently at 4.5%, with expectations of two more 25bp increases to hit a peak rate of 5.0%).
Other market positives are shifting the weight of risk: The US economy remains resilient (although this point will be tested by the reporting season currently underway); China has pivoted from its zero-COVID policy and growth is likely to surprise on the upside; the energy crisis in Europe has not been as bad as feared with a mild winter; the USD has peaked, providing assistance to indebted emerging markets; US retail investor sentiment is very low – a good contrarian indicator.
Additional positive background factors are the recent performance of global bond markets, the trajectory of the war in Ukraine (which shows that an aggressive Russia can be contained), the downward trend in energy and freight costs, and the deflating of various asset price bubbles (crypto, SPACs, some property sectors).
All forecasts are risky and inherently reflect known and hidden biases of the forecaster. That said, part of my role is to take a view. I may well be wrong, but I think putting money back to work sooner rather than later in high quality names will be well rewarded over the next couple of years.
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