Have We Hit the Market Bottom? Maybe Not | Chief Investment Officer

Perhaps we’ve seen the end of this bear market. That’s the sentiment animating the current rally, which since October 12 has propelled the S&P 500 up by 6%, including Monday’s 1.2% advance. How valid is that bullish urge?

Sure, investors have been burnt previously this year by bear market rallies. But this time, there’s talk of the Federal Reserve slowing its rate-raising pace and ending the tightening next year (the Wall Street Journal has reported that such a policy is under consideration). This news has inspired Wall Street hopes that we have seen the bottom. Which right now is 3,667, reached in mid-June. Even a well-known bear, Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, thinks the market has hit a “serious floor of support” and has upside ahead.

On the bull side, good signs also include that 1) the yield curve between the two- and 10-year Treasury is somewhat flatter, after a spell of wide inversion, and 2) oil prices are below what they were when the Organization of the Petroleum Exporting Countries and its allies announced production cuts ($88 per barrel versus $84).

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Still, to other strategists, turning the bear market around will requires much more. For Mark Haefele, CIO at UBS Global Wealth Management, it’s a case of what’s missing.

The market can have a “sustainable rally,” he writes in a research note, “once investors can see Federal Reserve rate cuts or a trough for economic activity on the horizon, or when valuations are so low that they already price in a bear case scenario.” None of that is happening now, or show any sign of appearing, he says.

A big hazard is that the Fed may well “over-tighten” because inflation has proved to be so stubborn, says Haefele .

The growth trough and the end of rate hikes should occur by mid-2023, but that isn’t like a starting pistol in a race, by his estimation. Only at that point would the Fed even consider reducing rates, he says. At present, the “continued rise in interest rates also means that valuations, despite falling in absolute terms, do not yet fully discount a bear case, especially in the U.S.,” he declares.

Says Haefele, “Trying to pick a bottom is a good way to lose a finger.”