The stock market has been on a bull run over the past two months, but investors don’t believe it can last.
- Markets have been fuelled by better news on inflation, as US CPI came in at 7.7%.
- Investors are also hopeful that growth may revive in China after an easing of the country’s zero-Covid policy.
- Market optimism is unlikely to endure in the face of recession or any revival in commodities prices
The MSCI World index is up over 14% from the middle of October, yet no-one appears very excited or inclined to call a turn in financial market fortunes. Deutsche Bank (among others) dismissed it as a bear market rally. Why are investors so gloomy in the face of some much-needed good news?
Markets have been fuelled by a combination of factors, though better news on inflation appears to have had the strongest influence. The latest US inflation data came in at 7.7%, its lowest level since January. This was followed by promising data in Europe, where inflation fell to 10%, 0.4% lower than consensus expectations. In both cases, significant falls in wholesale energy and food costs are having an impact on consumer prices.
There have been other factors supporting markets, including the difficulties in China. Markets are hopeful that public unrest may force a u-turn from the Chinese government on its zero-Covid policy, allowing the economy to reopen and growth to resume. A full reversal on the policy looks unlikely, but there are signs that the government is easing restrictions.
The relative resilience of corporate earnings has also encouraged investors. Companies appear to have been able to pass on higher input costs to their customers and this has helped preserve margins and profitability. This may not last indefinitely, but for the moment, it is keeping markets relatively buoyant.
However, Deutsche Bank does not believe this optimism can endure in the face of a recession in 2023. It believes recession will really take hold from the middle of the year, causing further weakness in earnings and share prices. It added that supply disruption could also see oil prices start to rise again. Crude oil prices have been falling since June and have been an important factor in easing inflationary pressure.
If oil prices were to rise, it may force the Federal Reserve to keep rates high even as recession bites. Faced with recessionary pressures and still high rates, stock markets would struggle to make progress. Valuations look more compelling today, but even that may not be enough to persuade investors to stick with stocks.
Certainly, retail investors have yet to be convinced. AJ Bell highlights the latest savings and borrowing data from the Bank of England, showing that £11.3 billion of money of savings moved into fixed-term accounts as rates leapt up in the wake of the mini-budget. The market may have rallied significantly in recent weeks, but equities are yet to rediscover their popularity.
