Mid-cycle changes harder to spot

Oksana Patron

16 February 2023

Commenting on the current state of market, Fidelity International’s investment director, Tom Stevenson, said that investors might have “turned up to the party before the invitations had even been printed”, given the surprising market’s rally since its October low.

But he also warned that what the market is currently dealing with is a mid-cycle change of direction which is harder to spot than big turning points.

Both trends share similar characteristics such as a widespread mood of pessimism, extremely low valuations and a preference for safe assets like cash.

“One of the reasons why we tend to discourage people from trying to read the market cycles ups and downs is that it often is ‘different this time’. In every single market cycle that I have looked at, the relationship between the state of the economy, corporate earnings, valuations and the overall level of the market is subtly different. The sands are always shifting,” Stevenson said.

“If it were always this simple, we’d all be rich. Unfortunately, there are many variables. The depth of the earnings downturn, or whether it even happens, is one. How far ahead of the turn in the real economy the market changes direction is another. How deep the retrenchment in valuations is one more.”

Fidelity’s director also said that investors were encouraged and made “some heroic assumptions” about how far interest rates will go and how quickly they will come back down again as the US stock market had risen by 15pc and investors had looked through gloomy economic forecasts for 2023 to an anticipated recovery in 2024.

Following this, investors have decided to accept optimistic earnings forecasts, put their faith in a soft landing and ignore central bank warnings that their job is not yet done.

However, it remained a tantalising possibility that the market had simply seen something that the rest of us had not, with now only a 25pc chance of a US recession this year and Europe also having dodged the bullet

“The reason I am concerned about the rally since October is not that the template from 50 years ago doesn’t fit but the fact that we haven’t yet reached that moment of peak gloom. Recession remains a possibility not a certainty, earnings are still flattish not really falling, and the US Federal Reserve seems happy to let the market rise without further comment,” Stevenson said.

“We may not be at peak gloom, but we may be at peak Goldilocks. The market is convinced rightly or wrongly that central banks will pivot to easier policy just in time to avoid a recession and forestall a serious downturn in earnings. If that is how things pan out then Mr Powell will have achieved what most of his predecessors failed to, a genuinely soft landing.

“Maybe he will, but we won’t know for a few months yet. And, in the meantime, I would expect the market to bounce around, revisiting the October low perhaps once or twice again. That’s OK. In fact, for anyone looking to build their investments, a prolonged period of consolidation before a renewed bull market begin may be a welcome opportunity to invest at a sensible price.”