Investors should learn from past bear markets

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 22, 2022.

Brendan Mcdermid | Reuters

According to Trevor Greetham, head of multi-assets at Royal London Asset Management, the stock market rally in recent days has been just a rally and investors should avoid being sucked back in.

Positive momentum for global stocks looks set to continue on Mondayafter Dow Jones Industrial Average up 2.7% on Friday and both S&P 500 and Nasdaq Composite more than 3%. European dishes Stoxx 600 Meanwhile, the index rose 2.6% on Friday, its best day in more than three months, and keep increasing in Monday.

However, Greetham from Royal London, which has more than $200 billion in assets under management at the end of 2021, is still not convinced that the downtrend is over.

“We still think we’re in a bear market and we think this is what you describe, a relief rally, and what we’ve seen so far is just the directional part. by the interest of that bear market,” Greetham told CNBC’s “Squawk Box Europe” on Monday, noting that falling commodity prices are likely to dampen expectations of a central bank’s request to raise interest rates.

The S&P 500 is still down nearly 18 percent so far, while the Stoxx 600 is down about 15 percent by mid-afternoon in Europe on Monday.

Regarding the duration of the bear market, Greetham suggests that investors look to other “central bank-inspired bear markets” such as the 2007-09 financial crisis, the early 2000s. when the dotcom bubble burst and the early 90s.

“You’ve had a two or three-year bear market in stocks and we’ve had six months so far, so earnings are the next issue. Central banks need to reduce inflation and that’s it. means generating spare capacity, and this can be quite he said.

“All of the biggest bull days happen in a bear market, so don’t get too drawn back into the market, I would say. There’s quite a bit of time to run through, and you have to be tactical and have to be tactical. diversification. “

Another possible source of market relief last week came from University of Michigan Consumer Surveysshowed that consumers expect inflation to increase at an annual rate of 5.3% at the end of June – down from preliminary results released earlier this month.

Central banks across major economies have begun cycles of aggressive rate hikes in an effort to rein in inflation that is at a multi-decade high, sparking speculation that monetary policy tightening Positive currency can push an already slowing economy into recession.

Greetham agrees that inflation in the US will soon start to fall as the Federal Reserve tightens its policy and makes a long-term commitment to curb rising consumer prices. However, he reiterated that the second phase of the bear market is yet to come.

“We have been in an inflationary stagnation with the slowdown and inflation rising, but we think we will continue to be in a recession as inflation eases, because central banks,” he said. will need it down for a long time. .

“So policy is going to be pretty tight, rates are going to be a lot higher even when inflation is falling, and that’s a problem for equities, because when you look at the In previous recessions, the stock market often didn’t settle properly until unemployment. The rate has peaked.”

Greetham pointed out that The US job market remains relatively strongsuggests that it may be another year or two before a sustained recovery begins to take shape.

However, he said it was “conceivable” that the market had a better grasp of inflation figures during the transition period between the “phase one bear market” and the “phase one bear market”. two”.

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