• Stock markets in a downward spiral this year
• Investors are now optimistic – summer rally on the US stock exchanges
• Glenmede strategists warn of “bear trap”
After US indexes fell significantly over the course of the year, with the Dow Jones hitting a 52-week low of 29,653.29 in June while the broader S&P 500 fell to 3,636.87, it then began to recover . The Dow Jones gradually regained one round mark after the other and climbed to over 34,000 points by mid-August. Meanwhile, the S&P 500 rose to over 4,300 points at times.
Was this just a bear market rally?
Glenmede strategists warn of “bear trap
As MarketWatch reports, the strategists at Glenmede warned that the shares could fall back again after the big summer rally, at least shortly after this meanwhile strong recovery. It looks like a “bear trap” is lurking in the stock market’s big upleg, which could lead to painful losses for investors, the strategists said in a report, according to MarketWatch.
Such rallies have often been seen in the midst of a down move in the past. For example, by examining a 50-year period in which there were six bear markets, the investment strategy team discovered multiple short-lived rallies in four of them.
Glenmede strategists see some parallels in today’s development with bear markets in the past: “The 17% rally from the June 16 low appears to be consistent with historical bear market rallies, which bounced back over 17.8% on average before they reversed course and hit new market lows,” the team said in its note to clients.
Jeremy Grantham: Crash not over – Bubble not burst
Stock market expert Jeremy Grantham, who warned at the beginning of the year that a “super bubble” had formed on the stock market, only recently warned investors to be cautious, as this bubble has not yet burst and explained that the recovery in the US stocks traded only a bear market rally from mid-June to mid-August. Such a bear market rally is common after an initial sharp decline and before the economy really starts to deteriorate, Grantham said. The GMO co-founder also expects that the markets will continue to go down. More specifically, Grantham predicted that the market slump was far from over, with the S&P 500 likely to fall about 50 percent from its peak.
Hopes of less aggressive Fed tightening streak are fading
And indeed, since it was able to climb to more than 34,000 points in mid-August, the Dow Jones has fallen again by around four percent to its most recent 32,381.34 points, and the S&P 500 has also lost around four percent to its most recent figure of 4,110.41 points (as of August 2017). : closing price on September 12, 2022).
Investors appear to be already reconsidering some factors in this summer’s recovery, MarketWatch reports, including hopes that the US Federal Reserve may not hike interest rates as aggressively as previously thought.
Among other things, Fed Chair Jerome Powell’s speech at the Jackson Hole central bank conference at the end of August may have contributed to this. Powell explained that the Fed’s “overriding objective” is to return to the 2 percent target for inflation and that this “restoration of price stability […] probably the continuation of a restrictive monetary policy will necessitate for some time” – in his opinion, too hesitant action would only increase the long-term costs. He also dampened speculation that the US Federal Reserve would soon reverse its policy of tightening, declaring that historical experience warned against too early a easing monetary policy.
The next Fed rate meeting is scheduled for September 20th and 21st. After the US Federal Reserve had already raised the key interest rate by 0.75 percentage points in June and July, it is currently in a range of 2.25 to 2.20 percent. Another hike of 50 or even 75 basis points could now be imminent in September. Powell told the Fed conference that the Fed’s decision at its September meeting “will depend on the totality of data coming in and the evolving outlook.” However, another “extraordinarily large” rate hike could become necessary.
Meanwhile, the European Central Bank also sent a signal of determination in the fight against record inflation in the euro area last week. The ECB raised the key interest rate by 0.75 percentage points to 1.25 percent – the largest interest rate hike in ECB history – and announced further interest rate hikes in the coming months.
According to Glenmede’s strategists, the further development – although the economic recession has not yet been confirmed – will depend heavily on the upcoming inflation data and interest results. So it remains to be seen how these turn out.
Editorial office finanzen.net
Image sources: Inked Pixels / Shutterstock.com, albund / Shutterstock.com