Market Insight Weekly Update: Roaring Back Or Headed For Recession?

The equities market picked up after 3 weeks of decline but rumours of recession persist. However, our investment team's advice is to stay disciplined and stick to your investment plan.
29 June 2022

In this week’s market update, the equities market picked up after three weeks of decline. The Fed interest rate hikes left investors and economists speculating about a recession. However, our investment team shares why this doesn’t mean you should pull out of the markets.

(20 June 2022 – 24 June 2022)

Equities regained their footing last week after declining for three weeks in a row with the S&P 500 and MSCI World Index up 6.46% and 5.38% respectively. MoneyOwl’s 100% equity portfolio was up 3.88%. The performances marked a near mirror-image reversal from the previous week when the S&P fell into a bear market as it tumbled more than 20% from a recent high in early January. Prices for global bonds rose for the second week in a row, with the Bloomberg Barclays Global Agg index up 0.80%. There wasn’t any particular market-moving news with many analysts attributing the rebound in equities as a relief rally from a deeply oversold condition.

Just two years since the Covid-19 recession, negative stock returns for the first half of 2022 and aggressive US Federal Reserve interest rate hikes have many investors concerned we are headed for another big “R” – if we’re not already there. Before you panic, however, it’s important to note that throughout the history of global economies, recessions are always identified with a lag. By the time one is called, the worst of its impact on markets has usually passed.

A recession is technically defined as negative GDP growth for two quarters in a row and is usually reported quarterly, which explains why recessions are therefore named retroactively, with the benefit of hindsight (and additional economic data that may be available with a lag). This is because recessions are proclaimed with a delay, rather than in real-time, so markets are often on the way towards recovery by the time of the announcement.

The table below shows that the stock market had already bottomed out prior to the month of announcement in two-thirds of recessions since 1980. In 2020’s recession, for example, the market’s low point came in March, three months before the announcement in June 2020. The takeaway for investors? If and when a recession is declared, we think the most sensible approach is to remain disciplined with one’s asset allocation; reducing exposure to stocks at that point may lead to missing out on brighter days ahead.

Source: Dimensional Fund Advisors

Recession Risk

Federal Reserve Chair Jerome Powell gave his most explicit acknowledgement to date that steep interest rate hikes could tip the US economy into recession. Testifying before the Senate Banking Committee, Powell said the other risk was not being able to get inflation under control. Economists are increasingly flagging the likelihood of a downturn within the next two years. Powell told the hearing that officials “anticipate that ongoing rate increases will be appropriate” to cool the hottest price pressures in 40 years.

Apple Flood

Apple is about to embark on one of the most ambitious periods of new products in its history – with the deluge coming between the fall of 2022 and the first half of 2023. The new products will include four iPhone 14 models, three Apple Watch variations, several Macs with M2 and M3 chips, the company’s first mixed-reality headset, low-end and high-end iPads, updated AirPods Pro Earbuds, a fresh HomePod and an upgraded Apple TV.

Unwavering Support

According to a draft statement from the G7 summit in Bavaria, the leaders will commit to providing indefinite support to Ukraine for its defence against Russia’s invasion. The leaders are also weighing the possibility of using revenues from tariffs on imports from Russia to support Ukraine. However, even the dazzling backdrop of the Bavarian Alps is not enough to hide a darker mood among the leaders, as the war, spiking energy and food prices, and supply chain disruptions continue to cause problems around the world.

Read more Market Insights here.

Disclaimer: While every reasonable care is taken to ensure the accuracy of information provided, no responsibility can be accepted for any loss or inconvenience caused by any error or omission. The information and opinions expressed herein are made in good faith and are based on sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Expressions of opinions or estimates should neither be relied upon nor used in any way as an indication of the future performance of any financial products, as prices of assets and currencies may go down as well as up and past performance should not be taken as an indication of future performance. The author and publisher shall have no liability for any loss or expense whatsoever relating to investment decisions made by the reader.

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