Market Outlook – How Long Will the Bear Market Last?
The main questions in the investment and trading markets are: how long will the bear market last and when will the recession reappear officially?
Market conditions are unusual to say the least. On the one hand, major economies like the US, EU and UK are recovering from recent COVID-19 recessions. On the other hand, they face yet another downturn triggered by red-hot inflation rates.
There’s a bull market in the crude oil and natural gas sector and a bear market in global stocks, while international travel companies like airlines are on the up. Meanwhile, China continues with lockdowns that impact heavily on supply chains and the productivity outlook for multi-national manufacturers.
These contradictions have been explained as being part of the distortions caused by COVID-19 and the conflict in Ukraine, but there may be other factors contributing to bearish sentiment and recession fears.
Interest rates on the rise
Interest rates are on the rise amid record levels of global debt. The elephant in the room is the growing possibility of debt defaults when the recession reappears. If inflation stays high, central banks will have difficulty reducing their interest rate guidance, potentially leaving the economy exposed to debt problems at the corporate and sovereign levels.
The Bank of Japan’s (BoJ) reaction to global recession fears was to double down with a record 80.8 billion USD sovereign debt asset purchase last week. How should we read this decision? If the BoJ is making a statement about its confidence in Japan’s economy, there is reason to believe that growth is picking up after COVID-19. Then again, the intervention could be the BoJ’s attempt to prevent panic and animal spirits from eroding the stock and bond markets to the point that bearish sentiment triggers a recession on its own.
Having made their hawkish stand, central banks in the US and UK will find it hard to make such interventions themselves without looking uncertain. That’s not to say that investors and traders wouldn’t feel reassured by similar interventions, it would just contradict the hawks’ recent decisions to raise interest rate guidance.
Stagflation lurks
Ever since the 2008 financial crash in the US, central banks made it a habit to calm nervous market participants with quantitative easing and low interest rates. These measures wouldn’t work for the central banks during the expected recession and stagflation because conventional monetary policy would advise hiking interest rates to control inflation.
There was a period of stagflation in the 1970’s, when governments hiked interest rates to such an extent there was one financial crisis after another. Will we reach that point? According to the World Bank, the situation is different today because the USD is strong and the stock markets are more adaptable. There are similarities in the sense that commodity prices – particularly crude oil – are persistently high.
One possibility is that inflation in key world economies will ease after all the hawkish measures taken by central banks. Another possibility is that the conflict in Ukraine will end sooner rather than later. Either one or the other of these possibilities would help reverse the course towards recession and stagflation.
At the time of writing, however, neither the geopolitical front nor the inflation front appears ready to give ground, meaning that bearish sentiment may prevail in the short-to-medium term.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
