STORM: Equity markets hit new lows for this bear market, with recession risks in the driving seat. After the Fed set out a vision of ever ‘higher-for-longer’ interest rates to tame stubborn inflation. The impacts have been global. Supercharging the US dollar ‘wrecking ball’ and seeing others step up interest rate hikes. This is tightening financial conditions everywhere and hitting both earnings and valuations. The OECD was the latest to cut its global GDP growth outlook, to only 2.2% next year as Asia singlehandedly prevents a global recession. Yet our four-indicator ‘bear market tracker’ shows all is not lost for markets, with three specific catalysts-to-watch.
TRACKER: Our contrarian four-indicator recovery tracker supports a market bottom but not yet a sustained recovery. Investor sentiment has capitulated. Inflation and interest expectations now peaked, with fed funds futures at 4.5% for January. The missing recovery drivers are valuations and growth forecasts. Both are depressed but not yet troughed. The S&P 500 P/E is well below its 17x average but still above our ‘fair value’ (see below) given the bond yield surge. US PMI’s are <50 and Q3 GDPNowcast only 0.3%, but earnings forecasts still positive though falling fast.
CATALYST: We see three near term ‘less bad’ market drivers. All that is needed with sentiment this poor. 1) Effort to talk back the dollar ‘wrecking ball’, or a softer Fed speaker hiking tone as policy ‘mistake’ risks rise. See G20 finance ministers and central bank governors meet Oct. 12, if not sooner. 2) Q3 earnings resilience, like Q2, starting Oct. 14. S&P 500 growth expectations fallen fast to 3%. 3) Lower US long term bond yields. Current levels and direction look contrary to a) easing inflation expectations, b) rising recession probabilities, c) a lower copper/gold ratio.
All data, figures & charts are valid as of 26/09/2022