Market Musings 261122: A Second Head-fake, Or A Real Bull Trend This Time?

27th Nov '22 by Edmund Shing

8 comments 1929 reads

Market Musings 261122:
A second head-fake, or a real bull trend this time?

It is tough to tell the difference between a bear market rally and a new bull market…

SUMMARY

Long-term interest rates decline, boosting stocks and bonds
Financial conditions are more supportive for stocks
Stock buybacks should accelerate into year-end
Stock market indices hold above key moving averages
Value stocks still look attractive versus Growth
Healthcare and Biotech is a new leading sector

How to tell between a bear market rally, and a new bull market?

Stock markets have rebounded sharply over the last few weeks. The average US and European large-cap stock has recovered 12-14% since the end of September. At this point in time, the UK FTSE 100 index has now recovered to flat for the year (+3% once dividends paid are included), while both Eurozone and US stock market indices remain around 155 lower than at the start of this year.

A double-digit rally for US + European stocks since end-September

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Source: tradingview.com

However, the question many investors have in their minds today is the following:

”Is this just another bear market rally as we saw in June, or is this the beginning of a new bull market trend?”

Arguments for continued pessimism

There are many reasons for believing this is just a bear market rally. After all:

we are in recession,
inflation is still very high,
central banks are still raising interest rates, which will drag on the economy, and
companies are still seeing earnings forecasts being reduced, as they are more and more impacted by the slowing economy.

Which is of course natural. So far, these don't really sound like classic conditions for a new bull market in stocks.

The counter-argument for a true market recovery

However, we should remember that most new bull markets are born in the midst of extreme pessimism, like a phoenix rising from the ashes.

So let's look at some of the evidence in favour of a more positive reading of the current rally.

First of all, financial conditions are improving. These financial conditions include:

tighter credit spreads in the corporate bond market,
lower levels of market volatility in the bond and stock markets, and
improving liquidity for instance, measured by the TED spread or broad money supply.

Secondly, long-term bond yields are falling. So the cost of financing at…

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Saxonboy57

27th Nov '22

Thank you for this very interesting article

WarrantStar

Thanks for this article. One of the best things about it is that it is so well balanced.

Indie

Bear bounce? Bull beginning?
…..or Santa rally?!
Good to have both sides of the macro view laid out. Confirmation bias/optimism is making me pick up on the good indicators more than the bad.

Martin VT

I am always surprised when stock markets recover whilst the economy is in recession…but that forward looking aspect of markets always seems to kick in. Also it’s not getting mentioned much now, but the awful scenarios (European energy collapse, nuclear weapon use, WW3, etc) around the invasion of Ukraine have settled down a lot in the last six months, and that must be helpful to sentiment.

Logical David

Many thanks Edmund for your balanced article. I remember being told that once a stock market has recovered 50% of its losses then there is an 80% chance that it will go on to make a full recovery and make new highs. Do you have a view on this statement??

David.

Albertos

I think one problem with BioTech and Healthcare ETF's or investment trusts is they tend to be skewed (quite massively as far as I can see) to US holdings. With the dollar currently falling they have a bit of a headwind to fight against.

Good article Edmund!

Phil

simoan

OTOH the weaker dollar will boost there overseas profits, a headwind they have been fighting against this year. So, swings & roundabouts. You should never let unknown future currency movements affect your investment process IMHO.

gmtrader

28th Nov '22

Ofc a lot depends on which market you look at. If you look at the ftse 100, it is just 450 points off it’s all time high, has had 6 straight weeks of increase and has hit the top of its downward trend channel. So it looks good for a decline now. If it does go on and breaks the recent high then there’s a good chance it will go higher. But breaking its all time high is going to take something big. Personally I see the ftse 100 like a good short bet from this level.

Market Musings 261122: A second head-fake, or a real bull trend this time?