A sharemarket rebound isn’t so far fetched according to respected analysts

Don’t fret about the federal budget, or inflation, or even the UK’s potential to spring surprises – we might just be heading for a major rebound on the sharemarket.

Some of the biggest names in the game are putting their necks on the block and “calling” a substantial recovery before the end of the year.

If they are right, there will be money to be made – or indeed recovered – by all investors who have been badly battered since the beginning of the year.

Over the year to date, the market has dropped 12 per cent and Wall Street (S&P 500) is down by almost 24 per cent.

You can collect a very large posse of pundits predicting doom and gloom anytime you like, but when a chorus of voices forecast a market rally, it’s time to listen in.

Traders working on the floor of the New York Stock Exchange. Picture: Getty Images

Ironically, the confirmation of bad news may well be the trigger for this reversal. Put simply, the worst outcome we might have expected – a worldwide recession – is close to being priced into market settings.

Once a recession is accepted, then investors look ahead and invariably they latch on to the factors that will ignite the next phase of growth. In 2023 bullish investors anticipate a convincing decline in the rate of inflation.

As Amil Nath at fund manager Montaka Global suggests: “The good news is that we could be reaching some form of an inflection point in the outlook for the economy, particularly for inflation and stock valuation.

“The root cause of market dislocation has been higher inflation.”

Sentiment is the swing factor. September and October are the most dangerous months of the year for Wall Street and, based on the sound assumption that we will blindly follow US trading patterns, sentiment may soon improve.

 

Bear bounce?

But there is an important split in the ranks. Some who suggest the market is ripe for a rebound believe that a market rally will be the first step in a long-term recovery that will benefit shareholders.

In contrast, others are “bears” who believe the market will bounce, but only within a longer-term downtrend.

Needless to say, nobody knows what is going to happen in the future. Some would even echo screenwriter Willam Goldman’s line after scripting a string of hit movies: “Nobody knows anything … every time out it’s a guess and, if you are lucky, an educated one.”

Still, what I find most reassuring about the educated guesswork on the prospect of a rebound is that it comes from some of the most conservative investors who don’t make a living from capturing wide attention with dramatic statements.

Tim Toohey, for example, is a former chief economist at Goldman Sachs and now head of strategy for Yarra Capital Partners. “You never get to buy the market at trough pricing, you have to be a bit pre-emptive … And we’re not far off that now,” he says.

Yarra Capital Partners head of strategy Tim Toohey. Picture: Paul Jeffers

Or Ashley Owen, the chief investment officer at Stanford Brown, notes: “Nothing scares investors more than talk of a recession.

“However, history shows that economic contractions have been mostly good for share prices and the Australian sharemarket has actually increased during the majority of economic recessions in Australia.

“The same is true for the US sharemarket during US recessions.”

These seasoned market professionals are basing their outlook on both the numbers before their eyes – how often do you see a 25 per cent drop on Wall Street? – along with the established patterns of market history.

In explaining how the sharemarket is now oversold – the chief US market strategist for Morningstar, David Sekera, says: “In a longer historical time frame, there have only been a few other instances when our price/fair value metric had dropped to similar levels.

“While near-term conditions may pressure earnings in the short term, at current valuations we think the market has fallen more than enough to incorporate those headwinds.

“In our view, we think the market is overly pessimistic regarding the long-term prospects for equity valuations.”

Closer to home, Toohey points to research covering a century that strongly suggests markets rebound when they can anticipate a turnaround in key economic data over a six-month time frame.

In other words, if we are expecting lower inflation in mid 2023 that would suggest the time to enter the market is before the end of this year.

 

Time to buy?

It’s not rocket science. Markets are all about anticipation; once a recession hits, then the market invariably rolls higher because the future will be better.

Owen at Stanford Brown likes to use this nugget of market statistical lore: The broad sharemarket index rose during 17 (81 per cent) of the 21 recessions in Australia since the 1880s.

However, you could be a believer in a market rebound and still think the overall trends are heading lower.

Bank of America’s chief strategist, Michael Hartnett, is typical here. He says a decent rally could be up and running before the end of his year, but only as part of a downwards move which will see Wall street hit a low of around 3200. It is near 3700 now from a top of more than 4500 at the start of the year.

Watermark’s Justin Braitling. Picture: Hollie Adams

And then you have those who think we have yet to see the worst of it.

Justin Braitling of the Watermark group is waiting for that phenomena beloved by all bears – capitulation: the ‘day of no hope’ when investors surrender to fatalism and sell indiscriminately.

“When the real capitulation happens next year, prices will fall heavily, and ETF volumes will spike higher along with volatility measures as retail money comes out of the sharemarket,” he says.

“There is a clear technical signature for capitulation which has been missing, a reason why a major cycle low is still ahead of us.”

Will there be a rebound? There has been no sign of it whatsoever in the last few weeks.

But that is precisely when rebounds take off. As Owen suggests: “Rebounds have always been faster and stronger than investors expect, and they start when fear and uncertainty are greatest.’