Peden says that with a mixture of ongoing problems facing economies and governments, investors should continue to expect volatility over the coming months but argues that equities have now most likely reached their low point.
“Predicting where equities will go after a miserable year is fraught, especially given challenges around inflation, interest rates, cost of living, supply chain disruption and the increasingly dangerous geopolitical backdrop,” he says. But stock markets rarely fall two years running. In fact, only 9% of the time has that happened in the US since 1928.
“The rollercoaster ride of recent quarters is not likely to get any less bumpy, certainly not in the very short term. Markets will continue to be thrown around by periodic labour market and inflation datapoints.
“But there are reasons to be more cheerful. The rate hiking and earnings downgrade cycles are getting long in the tooth, clearing a path to a period of more normal market returns and a happier investor environment.”
The discount rate is an essential consideration now, according to Peden. He believes it is now supportive for investors and there won’t be further “mammoth” hikes from central banks.
“A critical part of the valuation equation is the discount rate, and here the support is quite strong. There won’t be a repeat of last year’s mammoth monetary tightening as the peak inflation narrative gets louder.
“Economies are much closer to the end of this rate cycle than the beginning, despite further hikes expected. Rate setters want to maintain ‘higher for longer’ rhetoric to ensure inflation can fall materially, but Fed Funds futures now expect US rates to peak at 5.1% by year end and then to fall a full point by end 2024.”
Indeed, Peden says looking at historic performance, markets tend to bottom out one before economies reach peak inflation – a point that has already been passed.
“It typically takes around eight months between the last raise and the first cut so we will be discounting rate cuts in a few months. In fact, history shows the market bottoms one month before inflation peaks anyway, a point that will not be lost on more optimistic investors. This should all be enough to arrest the vicious swing out of growth into value and turn it on its head later in the year.
“More earnings cuts are on their way as economies slow markedly in H1, but investors expect much of that, and we have seen material cuts already. Equities have scope to re-rate this year, despite some imminent downgrade pressure still to come.”
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