Growing anticipation of another 50-basis-point rate hike has increased the probability that more bad news will plague equity markets locally.
In fact, Chad Padowitz, co-CIO at Talaria Capital, believes there will not be a durable bottom to equity markets until one of two things happens.
The first, he said, would be when leading economic indicators trough, allowing investors to anticipate a recovery in the economy and corporate earnings.
The second would be when central banks change to policies that support financial markets.
“Taking each of these in turn, we do not see leading economic indicators troughing until at least the second half of 2023,” Mr Padowitz said.
“Whether driven by falling leading indicators, spiking unit labour costs or rising interest rates and taxation, companies’ near-record margins are almost certain to come under pressure.
“And central banks have been very clear that their first priority is controlling inflation, so any pivot also seems some way off,” he added.
According to AMP’s Shane Oliver, driving this renewed weakness are similar concerns that drove the falls into June, including high inflation, increasingly hawkish central banks, and fears of an escalation of the Ukraine war.
“The risks are skewed to the downside in the short term,” the chief economist said.
“While investor confidence is very negative, we have yet to see the sort of spike in put/call option ratios or VIX that normally signals major market bottoms,” he opined.
Further increasing the risk is the possibility that overtightening of monetary policy could result in a deep recession with earning downgrades driving another leg down in share prices.
However, markets do not go down in a straight line, Mr Padowitz reminded.
“We would anticipate more bear market rallies like July or August this year,” he said.
“The key though would be to use these bounces to rebalance portfolios to protect wealth, instead of positioning for a return of the good times.”
Similarly, Dr Oliver said “we remain optimistic on shares on a 12-month horizon”.
This optimism is based on several factors including his expectation that the US has reached peak inflation, pointing to lower inflation ahead, with Australia set to follow in about six months’ time.
