Are we coming to the end of the sharemarket sell-off?

The latest US fed hike of 0.75 per cent pushes a potential rebound in sharemarkets out further – but not for as long as you might think.

The looming US quarterly reporting season might prove of more importance than this week’s US Fed actions. Picture: Getty Images

As is often the case, the most important developments across markets of late were not revealed by share price movements.

Consider ANZ’s recent note on economic forecasts, and the changes are quite noticeable:

“Based on current and expected price trends we now forecast a terminal Fed funds range of 4.75-5 per cent to be reached by Q2 2023, which is 100 basis points higher and almost six months later than we previously projected.”

In layman’s language: the Federal Reserve will be tightening for longer and pushing up interest rates a lot higher than previously assumed, which is not yet fully ‘priced in’ across financial assets.

Equally important: the team of economists at ANZ Bank is now reviewing its forecasts for the RBA in Australia for a potential higher-and-longer scenario locally, too.

It goes without saying, ANZ is but one forecaster in a global world of many, but this week’s update is indicative of the trend that started early in 2022 – and the same undercurrent has remained in place since: inflation is much stickier than assumed – central bankers will need to work harder to pull it back towards 2 per cent again.

Just about every economic outlook has the US – and the world in general – either close to or in recession next year. Imagine what higher interest rates for longer will do for the risks of recession?

Financial markets are transitioning away from exceptionally low interest rates and bond yields with low inflation to (when viewed from 2020’s starting point) much higher rates and bond yields and much higher and more persistent levels of inflation.

It’s not just central bankers and economists who have been underestimating how far and how long this process of taming inflation is likely to stretch out; the same observation can be made about investors and financial markets generally.

It is possible we’re only halfway through what needs to happen. This, however, does not automatically mean the only way forward is a steady regression into full-blown disaster. There are still plenty of what-if scenarios that can push equity markets in either direction between tomorrow and 2024.

Strategists at Citi recently summed it up as follows:

● Positive scenario: inflation comes down quickly, allowing central banks to stop tightening sooner – equity markets rally circa 20 per cent.

● Negative scenario: inflation remains sticky and central bankers need to continue tightening, causing a global recession – equity markets sink by 20 per cent.

Which is why, short-term, the looming US quarterly reporting season might prove of more importance than this week’s US Fed actions.

Take for example Munro Partners and its fund manager Nick Griffin. Munro’s international fund went 40 per cent into cash early in the year, and has since reduced that to 30 per cent. Those are big numbers for a fund that directs some $4.7bn in client money.

As Griffin puts it, fmarkets are forward looking, so while central bankers and economies might need more time to adjust, it is likely that the time to start buying more shares might “only” be three to six months out.

Rudi Filapek-Vandyck is the publisher at stock research service fnarena.com