Bull markets are back in surprise turnaround for stock investors
- Hang Seng Index is in bull market; Germany's DAX on cusp
- Strategists warn that more stock declines may follow
What a difference a month makes. From global equities hitting one low after another and market sentiment at rock bottom, to the return of bull markets.
Last month, stock indexes around the world were sitting at multi-year lows, hammered by high inflation and jumbo-sized interest rate hikes. Now, the Hang Seng Index in technical bull market territory and Germany's DAX on the cusp of one. Others -- including the Dow Jones Industrial Average -- are getting close.
The sudden turnaround comes after several big and unexpected boosts to market sentiment, including softer US inflation data, and news in China of easing Covid restrictions and policy support for the property sector. Today's news of thawing US-China relations has also helped.
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"The moves since early October have caught many investors off guard," said Mathieu Racheter, head of equity strategy at Julius Baer. "We have likely reached the lows of this bear market and think the year-end rally has legs for now."
The positive newsflow, along with technical factors, suggests gains in some markets could extend, according to some. "The combination of underweight positioning and the short momentum unwind in China tech hints at yielding more tactical upside risk to mainland and Hong Kong markets," said Stephen Innes, a managing partner at SPI Asset Management. "No one owned" China tech stocks just a week ago, he added.
As well as large-cap Chinese stocks, the turnaround has been most striking in the export-heavy German stock market -- which stands to benefit from China's reopening -- and more traditional "old economy" stocks in the US like Caterpillar Inc. and Boeing Co. Big Tech stocks in the US are still lagging in a new regime of higher interest rates.
Still, some strategists are skeptical about how long equity gains can last, while the bull market milestone may be less relevant than usual given how volatile stocks have been this year.
"Recent gains are more symptomatic of a bear market rally rather than the start of a bull run," said Susannah Streeter, an analyst at Hargreaves Lansdown. As well as risks persisting in China and a dimmer outlook in Europe, "fresh warnings from the Federal Reserve that the fight against inflation is still a hard slog" will keep investors cautious, she said.
Goldman Sachs Group Inc. strategists agree, warning that the rally in risk assets is "likely overdone" as risks of an extended rate-hike cycle remain.
Much of the moves may be down to positioning. Bank of America Corp.'s latest fund manager survey showed investors were most underweight equities and most overweight cash among asset allocations.
Historical analysis also suggests rallies in a falling market can be short-lived and create false impressions of a broader turnaround. During the last two major bear markets -- following the burst of the dot-com bubble and the global financial crisis -- interim rallies of 20% or more occurred and yet the market resumed declines afterwards.
"Starting a bull market part-way through a monetary tightening cycle, ahead of an imminent recession and with all sorts of negative structural and geopolitical challenges would be very unusual," said James Athey, investment director at Abrdn.
Takes More Than One
Bear market rallies can be forceful and still fail to prevail
Meanwhile, the main buyers of the rebound appear to be technical investors with trend-following and risk-adjusted funds increasing their exposure, while short sellers cover positions, indicating that gains may be fragile. Fast-money quants were effectively forced to buy an estimated $150 billion in equities over two trading sessions after US inflation data sparked a rally, according to JPMorgan Chase & Co. strategists.
What a difference a month makes. From global equities hitting one low after another and market sentiment at rock bottom, to the return of bull markets.
Last month, stock indexes around the world were sitting at multi-year lows, hammered by high inflation and jumbo-sized interest rate hikes. Now, the Hang Seng Index in technical bull market territory and Germany's DAX on the cusp of one. Others -- including the Dow Jones Industrial Average -- are getting close.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
