INVESTORS are dipping their toes nervously back into the markets this week after last week’s interest-rate shock sent shares tumbling by nearly 6%.
Where next for the bear?
The S&P 500 is down 25% year to date. It’s been a shocking first half and that’s before company earnings have started to reflect deteriorating economic conditions. It’s all been about falling valuations, with investors pricing in a growing threat of recession.
Last week’s 0.75 percentage point hike in US interest rates was followed by rises in the UK and Switzerland. There’s no question that rates are going higher, only how far they will go and how fast. In other words, will central banks break the economy before they get on top of rising prices. The Fed had stuck to the line that it could deliver a ‘softish’ landing, but last week it dropped its promise that the labour market could ‘remain strong’ as it raised rates. This is going to hurt.
But have markets already priced it in?
Markets move ahead of the economic reality so the fact that we are getting real about the economic cost of fighting inflation may have already been factored into share prices. The ratio of companies trading at new one-year lows to those at one-year highs – minus 48% – is typical of the bottom of a bear market, but some way off the minus 80% readings during the financial crisis and at the start of the pandemic.
And the sell-off has been indiscriminate. Even in the energy sector, benefiting from a high oil price, the number of shares trading above their average for the past 50 trading days is back at March 2020 levels. Sometimes things look so bad they might actually be good.
Time to buy the dip?
With many household name stocks having fallen much further than the market averages, contrarians are starting to get interested. When we looked recently at the 800 or so US stocks available on the Fidelity platform, nearly 100 of them were showing a fall of at least 50% since the start of the year. The Scottish Mortgage Investment Trust, which invests in many of the technology stocks that have led the market lower, is 49% down in just six months. It trades at a discount to the value of its assets of 16%. The average over the past three years is less than 1%.
Does the Scottish Mortgage sell-off present a buying opportunity?
