— Aug 31, 2022


Equity and bond markets have rallied strongly since the lows earlier this summer. Part of this can be attributed to a natural rebound from short term conditions that are sometimes referred to as “oversold”. Oversold or overbought is when there has been a temporary increase in volume of trades that have pushed the price of a company too high or (in this case) below what current market expectations are for the true value of the company. Once the volumes normalise then often the company share price will revert to its previous trajectory.

However, investors seem to have decided that the Federal Reserve will not be able to implement its desire to raise interest rates much further as economic news worsens and will instead be forced to ‘pivot’ toward actually starting to cut rates early in 2023 amidst a deepening recession.

In this way bad news has actually become good news, as the more information comes to light showing economic growth worsening, the sooner this pivot becomes a reality.

However, sometimes bad news is just that. The fact that inflation may have peaked (though there are many examples in the past of a fall and then a reacceleration) it is still over 8% and so a quick return  to the Fed’s 2% goal is highly unlikely. 

Indeed, having incorrectly predicted that inflation was transitory and not raising rates earlier, the Fed’s (and other central bankers) credibility is open to discussion. In the UK our Governor of the Bank of England Andrew Bailey appears increasingly error prone. We have lagged the US in raising interest rates even when our inflation is higher and his call for restraint in pay increases when ordinary families are struggling to meet their bills was politically ill-judged.

The evidence does not suggest that the predicted “pivot” to lower interest rates sooner is credible. Instead we think the recent increase in share prices to be a normal bear market rally during what may be a prolonged downturn rather than the start of a new bull market in equities and bonds. The sharpest one day gains on record have occurred when markets have been falling. A cautionary note might remind readers that in the 2000-2003 bear market there were two 40% plus rallies from lower points and one 50% + before the US stock market finally bottomed out.

We therefore remain cautious and ready to act as further evidence emerges regarding the global economic outlook.