Investors long for the catharsis of reaching a market bottom

At the beginning of this week, we had a look at markets . † † what is the technical term? OKAY?

A brutal stock sell-off, which made the week before the worst since the pandemic struck in the spring of 2020, suddenly reversed. A holiday in the US on Monday kept trading under pressure, but Tuesday brought the rarest: a sudden surge.

Perhaps influenced by the glorious sunshine that graced London at the time, a banker took this as a reason to be cheerful. “Give Summer Another Chance!” enthusiastically he wrote in a letter to customers. “Players want to buy shares again. Will it be stickier this time? We will see.”

Reader, it wasn’t tackier this time. The positive mood didn’t even seep into the next Asian session. But the brief moment of cheer reflects a sense that investors are getting a little desperate as the horror show set to take place in the first half of 2022 is over. Have we not suffered enough? After all, if you exclude the first quarter of 2020, this is one of the worst quarters for global equities since 2008. Surely the hour has come for heroes to time the market to perfection and buy?

On paper, yes, absolutely. “Valuations are starting to look attractive longer term,” noted UBS Global Wealth Management in its second half outlook. “The historical relationship between P/E ratios and future returns suggests it’s reasonable to expect US equities to yield 10 percent annual returns over the next decade.”

But not yet, unfortunately. The week may end on a slightly positive note, but the real twist in fortune remains elusive. UBS, like many investors, remains “neutral”, noting significant risk of major further declines from here on out.

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Tatjana Puhan, the Deputy Chief Investment Officer at French asset manager Tobam, describes herself as an optimist by nature. “My glass of water is half full,” she says. But she’s baffled by the push to end the bleeding in the markets.

“I think it’s ridiculous,” she says. “Financial TV said ‘markets are positive, maybe we’re through the worst’. Are you joking? Why would you suddenly be positive?”

She has a point. The war in Ukraine will not magically and quickly disappear. That will keep food and energy prices high and inflationary forces firmly in play. Central banks are chasing interest rates and investors are not strongly convinced that policymakers can avoid a hard landing – a euphemism for the collapse of the economy – especially after their previous confidence in temporary inflation proved misplaced. Even Federal Reserve chairman Jay Powell has now acknowledged that a US recession is “certainly a possibility.”

Quantitative tightening — the awkwardly-named process by which central banks get rid of the assets they’ve bought in recent years to support the system — has also just begun, and yet no one honestly knows what it will mean. “It’s a huge debate,” said Peter Fitzgerald, chief investment officer for multi-asset and macro at Aviva Investors. “Some people say these things are priced in,” he says. “It’s never been priced in.”

Moreover, Puhan is one of those who believe that, even after some steep falls in stock prices, many investors are still unwilling to give up the heavy technology stocks that dominate the US market.

“They are still considered safe investments,” Puhan says. At some point, investors will latch on to recession risks that she believes are largely underestimated. And at that point, the super-stretched elastic band of market valuations can break. She thinks markets could fall another 20 percent before the end of the year. “It’s absolutely possible,” she says.

That’s not a very happy message, especially from a self-proclaimed optimist, and it may be some consolation for investors – retail and professional – looking to rebuild bruised portfolios.

Kate El-Hillow, chief investment officer at Russell Investments, says that after the worst year-on-year start in three decades for bonds and one of the worst in the S&P 500 in a century, she wants “this revaluation to happen and move to the other side”.

In part, that’s because “the other side” is where you can pick up some bargains and rebuild wallets. “It’s a good time to think about ‘where am I going to bet?'” she says. In addition, however, speed is a virtue in itself. “We want it to move a little faster while consumer and business balance sheets are still strong.”

This is the fund manager’s equivalent of getting that root canal surgery done sooner rather than later. Yes, the synchronized decline in risky assets is unpleasant, but if we can pull it off quickly, markets may have time to stabilize before businesses and households run through the financial buffer they built up in the heyday of cheap money.

Markets and real life don’t always move together – the 2020 economic crash, for example, coincided with a massive rally from March of that year. Perhaps the markets can now bear the burden. Embracing the pain may be the best way to move forward.

katie.martin@ft.com

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