During the month of October, equities rallied, but ever since, the market strength has evaporated. What is the next move to be expected, and what should you look out for?
In the aftermath of previous market corrections, such as the 1997 hedge fund crisis, the 2001 dotcom correction, or the great financial crisis of 2007/2008, a coordinated central bank policy, by means of easing the monetary policy, was the successful action. Today to combat inflation, central banks are expected to tighten, yet this would result in the stock market correcting further.
In a policy-driven world, what is the playbook investors can expect, or expressed differently, what are the base conditions for the market to move forward?
- Inflation needs to reach a viable level. Research suggests that demand and supply are softening, which in turn should take pressure off for higher prices. If so, then solely wage pressure is expected to drive inflation. We would expect this cycle to last some 6 to 15 months, which might be sufficient to indicate to the market that the bottom is in sight.
- With a weaker demand/supply equation, the broad assessment would suggest that corporate profits are still too high, and consequently, stock prices have to fall further before bottoming out. Given this, the 2023-2024 ratios are expected to be lower when compared with the 2022-2023 ratios. How much of this is already priced-in? Probably too little for now.
Given this lackluster outlook, we remain focused on workable solutions such as health care, energy, and defense. These sectors benefit from above average growth, dividend increases, and share buybacks.