Was that the bottom? 2 hot takes on the recent market moves

What's that noise, you ask? That’s the sound of pressure being released out of the market. 

We've heard an ever louder cacophony of bearish market calls in recent weeks, and fair enough. There has been plenty to worry about. But it's always darkest just before dawn – and out of nowhere, we've seen two 750+ point surges on the Dow, and a 3.75% pop on the ASX 200 yesterday, which is being backed up with further gains today.

While the snap higher is very welcome, investors are unlikely to forget the context within which the gains have arrived.

Firstly, the technical. The following stat from Hawkeye Analytics is telling:

Since 2000, the S&P/ASX 200 Index has recorded a daily gain of > 3.50% on 31 occasions (including yesterday's gain of 3.75%). Interestingly, all of these 31 outsized gains occurred while the index was trading below its 200-day moving average.

Each of the 31 times since 2000 that the market has rallied more than 3.5% in a day, it has been trading below its 200-day moving average. The moves have never come during a screaming uptrend but rather, have arrived when the market is in some form of recovery. 

With that in mind, I reached out to two of my friends, Henry Jennings from Marcus Today and Isaac Poole from Oreana Financial Services, for their hot takes on the recent market moves, how they're playing things, and whether or not the move higher is sustainable. 

My first question was this: Does the current rally signal the bottom, or is more pain ahead?

Both are relatively bullish. 

Starting at the macro level, Poole believes the current rally may signal the bottom for now and could mark a turning point that endures through 2023.

He believes the RBA is moving towards a pause that will likely begin by year-end and last through most of 2023. Poole also expects the Fed to deliver fewer rate hikes than the market is pricing in currently, and then pause for much of 2023.

"That is supportive of equities, in our view," says Poole

A "violent" rally

Jennings couches things in the context of what came before, noting that “the rally has been very violent. Swift and brutal for the shorts.”

He also points to the build-up of negativity and the crowded trade in the US dollar, with bond yields stretched: “We have seen how quickly and dramatically these crowded trades unwind.” Jennings highlights oil as the prime example when it was “a certainty, at US$130, to go to US$200, and yet it collapsed.”

The point Jennings makes is an important one. Markets became oversold and then snapped back. With so much negativity and many short-sellers out there, any good news is a massive driver.

"Markets overshoot. It did to the downside and will to the upside," says Jennings 

All that said, Jennings remains cautious the further out in time he looks. “We are far from out of the woods… At some stage, the bears will be back and we will see fresh lows but that could be a way off, so enjoy the rally."

As for what Jennings and Poole are doing about the recent market moves, it varies, keeping in mind that Poole focuses on asset allocation, while Jennings runs a small cap portfolio for the Marcus Today newsletter.

Jennings notes that the moves have happened quickly. "But there are always opportunities. Easy money has been made and maybe things get a little harder, but there are always stocks with upside once the negative macro picture changes," he says.

Jennings is happy to put money to work but is cognisant of the fact that the market has gone from 6450 to 6800 in two days. He'll be picky from here and isn’t interested in “playing the FOMO game.”

"I know we are supposed to react rather than predict but I believe that it’s our job to predict. By the time we react, then it’s over. That is a danger," Jennings says.

Poole, taking a slightly broader view, shares what Oreana has been doing at an asset allocation level recently, and how the recent moves support the team’s thinking and thesis for markets.

Oreana increased its allocation to government bonds, focusing on longer duration. They did this when 10-year US Treasury yields popped above 4%.

“This is quite attractive from an income, diversification and downside protection perspective," Poole says.

Oreana also added to Australian government bonds – overweighting them relative to the US credit market. This reflects the view the RBA and the Fed are heading for a pause sooner than the market anticipates.

Finally, Oreana has remained modestly overweight equities, with a bias towards Australian equities and quality in general – a view that Poole has shared before on the Livewire platform.

“While we think equity beta will perform OK over the next 12 months, the challenge will be for companies to hit their earnings targets in the near-term, and that will probably favour higher quality companies.”

More signposts to watch for

Unsurprisingly, both focused on inflation when asked what other evidence they're looking for to support a sustained move higher.

Poole is emphatic in his assessment, saying that the Fed and the RBA have no inflation expectation problem.

“There is no wage spiral. And core inflation is trending lower in the US – and we expect will trend lower through Q4 in Australia. The key here is the pause from central banks," he says.

Poole adds that a pause, which he has been anticipating for some time, will extend the economic cycle.

“In early 2023, markets will probably wake up to the idea that a recession in 2023 is neither inevitable or necessary. And that will be important for narrowing risk premia and improving returns," he says.

Jennings is also looking for more data showing that inflation is abating. 

“Inflation may have peaked but we will continue to see volatility,” he says. In addition, Jennings emphasises that with central banks now having to consider financial stability, the Fed may well start to be less aggressive – which would be good for equities.

Jennings throws a few more factors into the mix, highlighting the US earnings season and the US dollar. A weaker greenback will be a good sign, and that is already happening, while everyone needs to remember that the Christmas season is coming up, and consumers will remain key. 

Never miss an insight

If you're not an existing Livewire subscriber you can sign up to get free access to investment ideas and strategies from Australia's leading investors.

And you can follow my profile to stay up to date with other wires as they're published – don't forget to give them a “like”.