Investors would be well served to remain patient during the current countertrend rally, according to analysts at ClearBridge Investments, who believe that a ‘durable bottom’ in equity markets has not yet formed.
While the S&P 500 has risen by more than 9 per cent from the lows reached in mid-October, ClearBridge investment strategist Jeff Schulze and investment strategy analyst Josh Jamner noted that countertrend rallies are not an uncommon occurrence.
According to Mr Schulze and Mr Jamner, seven such rallies occurred during the bursting of the tech bubble and associated recession, and eight during the Global Financial Crisis.
“The largest of these countertrend rallies were over 20 per cent in each case, and the longest lasting of them ran for 101 trading days, or 4.5 months,” they said.
“So far, the current bear market has only seen five countertrend rallies, with the 17.4 per cent pop over 44 days this summer being the longest and strongest among them.”
While the bottoming process is expected to take some time, Mr Schulze and Mr Jamner said that the current rally may continue in the wake of the upcoming US midterm elections as uncertainty over control of Congress and the policy agenda abates.
However, the risk of recession continues to loom over the markets, with the ClearBridge Recession Risk Dashboard retaining an overall recessionary signal in October.
“Although a durable recovery will eventually unfold, we expect market turbulence to continue through the coming quarters as investors face their first proper economic downturn in over a decade,” said Mr Schulze and Mr Jamner.
“While the current sell-off is now 10 months old, it remains much shorter than the 16-month average that post-WWII bear markets have lasted.”
Other factors highlighted by the ClearBridge analysts as posing a challenge to the current rally are the “overly optimistic” views that the Fed will pivot to a slower pace of rate hikes, a dip in earnings expectations for 2023 and falling investor sentiment.
“The bottoming process is a bumpy road that typically sees both ups and downs, requiring investor patience. We continue to believe that tilts toward defensive sectors and a quality bias will be beneficial for equity portfolio positioning over the intermediate term,” they concluded.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
