Market Musings: What is in store for H2?

6th Jul '22 by Edmund Shing

12 comments 1818 reads

The first half of 2022 has been extremely painful for stock and bond investors: can the second half see a rebound?

Summary:

Pessimism abounds - but this is not enough to ensure an H2 rebound
The global economy is still deteriorating rapidly
Energy costs are the key driver of this slump
Company earnings forecasts still need to adjust lower
Financial conditions are the key indicator to monitor
Extreme pessimism can lead to long-term investment opportunities

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Pessimism abounds…

The first half of this year has been torrid for stock and bond investors. This is a very unusual occurrence - normally, when stock markets fall sharply as they have so far this year, bonds partially compensate by rising.

However, 2022 has so far seen double-digit declines both in stocks and bonds at the same time, as recession fears and very high and bond-unfriendly inflation have combined to hurt both of these key asset classes.

Measures of investor sentiment have understandably declined to pessimistic lows as a result of the economic uncertainty and declines in investments.

AAII retail sentiment: lowest number of bulls since 1990

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Source: https://www.aaii.com/sentimentsurvey

This is unsurprising, given the huge level of uncertainty created in large part by the Ukraine conflict, and compounded by central banks raising interest rates in response to record inflation rates.

Global growth is collapsing at the moment, driven by a slump in domestic consumption and corporate investment, both hurt by cost inflation, in particular energy costs. Economists have underestimated the scale of this slump, and now race to revise their growth forecasts lower.

Rapid deterioration in the global economy

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Source: Bloomberg

Expect earnings forecasts to come down

Surprisingly, in spite of the downbeat economic outlook, forward earnings estimates for US, UK and Eurozone companies have continued in aggregate to rise so far this year.

Company earnings forecasts have continued to rise through 2022

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Source: Bloomberg

Historically, US earnings forecasts have been closely linked with the momentum in economic activity, most notably the…

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Johns54

6th Jul '22

"However, 2022 has so far seen double-digit declines both in stocks and bonds"

So the FTSE has been bouncing up and down between 7600 and 7000. How is that double digit declines? The sell off has been very selective.

Rusty2

Yes the FTSE All Share Index is only down around 7% YTD, which was also the peak, it is smaller companies that have been sold off. BP (LON:BP.) and Shell (LON:SHEL) have done well but have fallen back recently.
Raising interest rates to dampen growth I feel is wrong, when inflation is being caused by energy costs, this is more likely to cause a recession.
I fear there is much worse to come.

BnB

The sell off has been very selective

Quite the opposite for global investors - the FTSE is a complete outlier!

Revs8

Investors seem to be using any share price rises to get out into cash. The reaction to Argentex (LON:AGFX) today demonstrates the pervading negativity. Good news = SP rise followed by selling = SP now 5% below close yesterday. That is on the back of a very good update. Even the long term holders must be having their patience tested by the way the market is behaving.

It concerns me that several shares and indices seem to be consolidating near their recent lows. It feels like they are making room for another leg down IMO.

The All share started the year at 4208 and is now at 3925 a decline of 6.7% so not a complete outlier

sheeza

The bear market won't be over until the last bull sells

TheFloatingInvestor

Revs I also feel we have another sell off to come, but I wonder if many of the small caps are now devoid of sellers...maybe another 5 or even 10 percent, but can't see much beyond that. I can think of 20 value small cap companies at rock bottom S.P's.

I must agree on the Bit coin bubble busting and the effect on young investors, although I suspect a bull market will see many of them return, and 'some' would be enough fuel.

Chris Brown

Bear in mind the All-Share is dominated by the FTSE 100 due to the market cap weighting.

Take a look at the FTSE 250, Small-Cap, AIM, S&P500, Nasdaq, CAC, DAX, MIB, IBEX, Topix, KOPSI... MSCI India, Brazil... and so on. All hammered.

FTSE 100 has held up far better than most due to its sector exposures. China is one other refuge, with almost negative correlation to global stock markets currently, due to local factors.

Most of those have gone up far more than the FTSE 100 and Allshare index, so a correction is more likely. S&P500 is up around 4x in the last 12 years. The £ has fallen so actually our indexes have not held up in real terms. I hold a S&P500 tracker, it is up over the last 7 weeks if based in £. Something to bear in mind if trading US stocks in £.

Epitychia

7th Jul '22

I think bear markets bottom when value is compelling AND they have gone on long enough that investors are no longer shocked. Also as another commentator said 'when all the bulls have left the building'. I don't see any of this at this point in time.

My guess is that we are half way through.

Breakout Trader

8th Jul '22

Dr.Michael Burry tweeted something along these lines earlier this week... about half way through, the next phase is when earnings forecasts come off and markets drop accordingly. Looking at the chart above, earnings forecasts do appear to be topping out.

This could well get worse before it gets better... hopefully I'm wrong on that.

donald pond

I fully understand the argument that we are half way through the bear, and having suffered multiple compression we will now see earning compression. However, in the "this time its different" column are employment: it remains strong and businesses are fearful of letting people go because it may not be difficult to rehire in better times. Perhaps that is a demographic thing. And above all, money needs to go somewhere. Bonds have had a torrid time, gold's not done well, crypto has been a washout, real estate looks very pricy. In 2000, at the height of the dotcom boom, inflation was 3% and bonds yielding 6%, so there was a 3% risk free return available. That's not available today. And that may support stock prices.

Market Musings: What is in store for H2?

Summary:

Podcast of the week: Cryptocrash!

Pessimism abounds…

Expect earnings forecasts to come down

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About the Author

Edmund Shing

12 comments

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