Market Update: Are we approaching another recession? September 16th, 2022

“Buy-the-dip” has in the main, worked well for many since the Global Financial Crisis.

This strategy, saw investors pile into growth assets like shares and property when markets pulled back, confident that in the blink of an eye, the market would rapidly recover and move onwards and upwards to new all-time highs.

For the past ten years or so, Buy-the-dip has worked.

But it could be, that we’ve become so complacent with low-interest rates and all that entails, that we lose sight of what’s actually happening.

We forget that eventually, the economic fundamental chickens come home to roost and those who ignore those fundamentals are doomed to become Sunday’s roast.

It’s now starting to look like any hope of a gentle massaged correction to the scourge of worldwide inflation is doomed.

The chances of a worldwide recession are growing by the day.

Again, central bankers are suggesting that if a recession does occur, it will be mild and short in duration.

These are the same “gurus” who were telling us this time last year, that interest rates would remain low until 2024.

Before last week’s US Inflation numbers came in, there was hope that the US Federal Reserve (The “Fed”) would ease off on future rate rises.

Markets were hoping that on the back of declining inflationary pressure, next Thursday morning our time, we might see a rise of just 0.5 percent or even 0.25 percent.

Well, you can forget that.

The Fed hopes and needs to bring inflation back to around 2 percent. Last week’s number saw US inflation come in 4 times that target rate at 8.3 percent.

Central banks like the Fed and the Reserve Bank of Australia lift interest rates to kill off the inflation dragon.

To kill off the insatiable demand that’s driving up prices, take away people’s surplus income by forcing up their loan repayments.

But thanks to the disastrous inflation numbers revealed last Wednesday, markets have pretty much locked in a rate rise of 0.75 percent by the Fed and there are even some experts suggesting that the next rate-rise, could be a whole 1 percent.

And here’s the real problem.

Central banks will keep lifting those interest rates, until the strategy works. That is, inflation is tamed. And while we might all be concerned about what that might do to asset prices like shares and property, remember that none of this is of concern to Central bankers. Their brief is to keep currencies reasonably stable, unemployment down, inflation in a range of 2 -3 percent and the economy growing.

What happens to the value of your super fund is not in their charter.

What markets seem to be ignoring at present is that eventually, the decline in demand must translate into a decline in revenue for companies that rely on that consumer demand. And let’s face it, that’s most of them.

Keep the car another year or two, make do with the current smartphone, go with a $15 two-litre cask of wine instead of the $25 bottle and buy home-brand toilet paper instead of the expensive stuff.
Eventually, those consumer decisions must affect company profits and their associated growth forecasts. When it does, that could translate into a fall in stock and other asset prices that might best be described as, “spectacular”.

And some of the respected old-time market watchers are very worried.

With the US S&P 500 index already down by 18 percent since its December highs to a figure of around 4000, you would hope that things couldn’t go much lower.

Best sit-down.

Some of the old timers reckon it could easily get down to around 3,300. That means a further fall of about 18 percent again. A similar fall here would put the Australian All ordinaries index at around 5,800.

Let’s hope the old buggers are wrong.