Monthly Comment August 2022

Bear Relief Rally

Monthly Comment for August 2022

Stock Market “Relief Rally” – a bear market rally or the start of a full recovery?

Temperatures remained high during the summer holidays in Europe but stock markets have seen a relief. By end of June, investor sentiment and positioning had become extremely bearish so risk assets enjoyed a “relief rally” in July.

This relief rally was likely caused by the following factors:

* Better than expected earnings announcements: The US earnings season was characterised by a 2% “beat” in sales, while profits exceeded expectations by 5%. This means that companies have pricing power, and are so far succeeding to pass higher input costs on to consumers.

* A “short squeeze” as investor positioning had become too bearish, especially in sectors that had fallen the most (such as Tech).

* A fall back in longer term interest rates (i.e. long term bond yields) as investor focus shifted from inflation (and monetary tightening) to possible recession (and subsequent future monetary easing). The “market” has probably fast forwarded a bit too far, too soon in this respect.

For us, being long-term investors, broad diversification remains paramount – including a neutral geo allocation, and a now neutral positioning between the different style factors (growth, value, etc). We expect a difficult and probably volatile remainder of the year but want to avoid excessive market timing which is usually a fool’s game.

Here’s the thing about bear market rallies: They’re deceitful, because they can be long-lasting. Bear market rallies can go on for weeks or months before the market heads south again and bottoms out. According to Bloomberg, bear market rallies since the end of 1927 have lasted an average of 627 days before indexes dropped lower and bottomed out. By Bloomberg’s count, the longest was 1,616 days, and the shortest was 133 days.

Since the crash of 1929, which helped cause the Great Depression, the S&P 500 (and its predecessor index) have witnessed 14 separate bear market rallies. The phenomenon has become more prevalent in recent years, according to Bloomberg’s calculations. Since 2000, there have been five bear market rallies.

Excerpt from ISGAM’S Monthly Comment for August 2022.

By Marianne Rameau, ASIP, Portfolio Management Team, ISGAM AG

Contact: enquiry@isgam.ch

This document is prepared for educational and informational purposes ONLY, by ISGAM AG. Please click here for the important information. It is not intended, nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. The information provided is not to be treated as advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Past performance is not a reliable indicator of future performance.

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