Why the markets could rise despite peak bearishness

Why the markets could rise despite peak bearishness

Hartnett is one of Wall Street’s biggest bears and has been incredibly accurate in judging the market’s downturn this year. His stance on the outlook for stocks hasn’t changed, and he still believes the S&P 500 will eventually fall from its current level of 3720 points to as low as 3200 points.

But he says that with investor sentiment this bad and cash stocks so high, arguments can be made for a “decent counter-rally.”

Another prominent bear, Morgan Stanley’s Mike Wilson, is even more explicit in his call for a rally, saying he “won’t rule out” a late-year jump that could take the S.&P 500 to 4150 points by year-end, up about 12 percent from current levels.

The Twilight Zone

“While that seems like an awfully big move, it would be consistent with the bear market rallies of this year and prior,” Wilson says.

Again, Wilson is not changing his bearish view on stocks in general, and sees the market bottoming out between 3,000 and 3,200 points. At midpoint, that means Wall Street needs to fall another 17 percent from here, which would mark its decline to 35 percent from its peak earlier this year.

But Wilson’s short-term view reflects the idea that markets are in a certain twilight zone, or holding pattern.

We know that higher interest rates will eventually bite, pushing economies into recessions (or severe slowdowns) and hurting earnings.

But earnings season results for the US September quarter – and indeed the trading updates we’ve seen so far from Australia’s annual shareholders’ season – suggest earnings are holding up fairly well for now.

And economic data on both sides of the Pacific continues to be strong. Official inflation data is not yet adopted, suggesting that consumers are happy to swallow higher prices. And whether it’s Brian Moynihan, Chief Executive of Bank of America in New York, or Shayne Elliott, Chief Executive of ANZ in Melbourne, the story is the same – consumers are not yet showing any signs of chickening out.

John Stoltzfus, chief investment strategist and managing director at Oppenheimer Asset Management, is another analyst who sees the potential for a modest year-end rally given the resilience of the US economy and US earnings.

investors hope

“In our view, the rallies earlier this year have indicated where the market plans to go once the Federal Reserve’s efforts to contain inflation have had a positive effect in actually containing inflation,” Stoltzfus said.

This is a key reason why investor psychology could support a modest short-term rally. While the bear market may have peaked, it’s important to remember that most investors assume that stock markets will eventually rise.

John Wood, Credit Suisse’s chief investment officer in Asia Pacific, calls it the beach ball effect: This means that if you try to keep a beach ball under water, it just wants to come up again and again.

With every new data point – particularly inflation data given their importance in how central banks around the world set interest rates – investors are hoping for the best, even when they are expecting the worst.

“Every stock investor is an optimist because they want their stocks to go up,” says Wood. “My feeling is that when this inflation data comes out, stock investors will be hoping for a pivot, a pause, or a put.”

Wood has a hard target of 2800 points for the S&P 500, but he too sees a bear market rally going into year-end. “Markets are oversold and it’s perfectly natural to have value, provided the appropriate catalyst is in place,” he told a Credit Suisse conference in Melbourne on Wednesday.

The delayed pain of rate hikes is sure to come in 2023. But in the very short term, don’t be shocked if water polo picks up.

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