(Bloomberg) — A crisis of confidence in the outlook for the UK’s finances was the latest trigger for risk aversion, helping drag the S&P 500 Index to an almost two-year low. Yet with investor sentiment in the gutter and the Bank of England vowing to open the checkbook to prop up its bond market, could another equities bear-market rally be in the cards?
Most Read from Bloomberg
Gazprom Halts Gas Supplies to Italy in Latest Energy Battle
Fed Begins to Split on the Need for Speed to Peak Rates
Indonesia Suspends Football Matches as Riot Kills at Least 129
Get Ready for Another Bear-Market Rally, Strategist Emanuel Says
Ukraine Latest: US Sees Russia Pullout From Lyman as Encouraging
Julian Emanuel says so. The chief equity and quantitative strategist at Evercore ISI joined the “What Goes Up” podcast to talk about how he’s making sense of it all. Below are condensed and lightly edited highlights of the conversation. Click here to listen to the full podcast, or subscribe on Apple Podcasts or wherever you listen.
Q: How important is what’s going on in the UK for global markets?
A: The backdrop here is just to understand that for investors, the storm that has been 2022 thus far, the dominance of macro imperatives across all assets, has really been unprecedented. And it really goes back to this idea that after 25 years of quiescent inflation, we had a breakout in the readings. That’s now been over a year and obviously really feeding into the Fed’s imperative to get inflation under control by going on this unprecedented degree of hiking. We think about the current status as something from that movie “Super Size Me.” You’ve done three 75 basis-point supersized rate hikes; you might do a fourth in November.
This is the kind of rapid acceleration and tightening that reverberates across the globe. The conduit has really been the strength in the dollar feeding into the UK. You’ve had a leadership change, the queen’s passing, a new prime minister, a new government — just total huge challenges in a market that had already been showing strains, frankly, since the Brexit vote in 2016. So really, testing the outer bands of volatility across every asset that’s in the UK.
Q: Is there an assumption going on that the Bank of England, by promising to buy bonds, is foreshadowing what’s to come from other central banks? Eventually are the Fed and the European Central Bank going to have to come out and say, “Yeah, we’ll do whatever it takes too to keep bond markets in check?”
A: If you go back to the end of last week, it really all started with a point in time, call it Friday [Sept. 23] morning, where one looked up on the screen and every single indicator, every single asset, every single market was completely red. Whatever it was, indiscriminate selling, that to us was the start of this emotional phase. Because it was clear the policy mismatch between the new Truss government and Kwasi Kwarteng, the chancellor of the Exchequer, and where the Bank of England felt it needs to go — needed to go, needs to go, and that’s an open concept, which is why I keep changing tenses — is that it’s really caused this instability that got some feeling as if there was this idea that the UK was about to become an emerging market. And seeing the kind of volatility in the bond markets there that one had seen throughout time in places like Mexico during crises or Brazil, or going back to the Asian Tiger crisis in 1997. That type of volatility.
And frankly, because so much of UK debt is denominated in sterling, that wasn’t necessarily going to be the way it would play out. But nevertheless, the markets have become just very, very illiquid and people got very, very afraid of buying bonds in an environment where there’s still no concrete evidence that inflation, particularly in Europe, is showing signs of topping. Although that evidence is starting to build quite rapidly in the US.
Q: The other big story of the week is that the S&P 500 set new lows for this bear market. Is the acute selling over and then maybe there’s a bear-market rally in store for us?
A: We are feeling that way. Basically from our point of view, these kinds of bear markets — and if you go back to the highs in January — they don’t move in straight lines. And the last several weeks, in response to this ratcheting higher in yields across the globe, has been pretty much of a straight line move down in stocks. Which, if you think about it, September: we don’t want to go back to school, we don’t want to go back to the office four or five days a week. The psychology tends to be poor in every September, but particularly so this year because you have all this macro uncertainty and a Fed who’s committed to hiking rates and keeping pressure really on the rest of the world via the stronger dollar through the rate-hike transmission mechanism. But for us, we started seeing signs that this kind of activity was unsustainable.
The VIX has started spiking, you’ve seen investor sentiment that’s really only as bad as it’s ever been near the trough in 2009, and near the bottom of the first Gulf War bear market in 1990. And so for us, those kinds of ideas — along with the fact that October tends to be a turning point for stocks and the data — and that as much as we don’t want to think about midterms, the following year after midterms tends to be good as well. Given the fact that we thought that the yield moves were becoming parabolically unsustainable, we did feel — and do feel — that that will transmit into higher equity prices, certainly in the near term, perhaps even longer.
Click here to hear the rest of the podcast.
Most Read from Bloomberg Businessweek
The Unstoppable Dollar Is Wreaking Havoc Everywhere But America
Jay Powell Needs Investors to Lose Money
The World Sees Brazil’s Election as a Climate Flashpoint. Brazilians Have Other Concerns
Twitter Is in This Mess Because Jack Dorsey Was Too Busy Being a Bitcoin Influencer
Cash Retakes Its Crown as the Fed Wrestles With Inflation
©2022 Bloomberg L.P.
The New York Times
Gerrymandering Isn’t Giving Republicans the Advantage You Might Expect
There is no shortage of reasons Republicans are expected to retake the House this year, including President Joe Biden’s low approval ratings and the long history of struggles for the president’s party in midterm elections. But there’s another issue that looms over the race for the House, one that doesn’t have anything to do with the candidates or the voters at all: the fairness of the newly redrawn congressional maps. Sign up for The Morning newsletter from the New York Times You might assume th
Financial Stability Keeping Thailand From Raising Rates Too Fast
(Bloomberg) — The need for financial stability, one of the three main objective of the Bank of Thailand, is keeping monetary policy makers in the Southeast Asian nation from raising interest rates too fast. Most Read from BloombergGazprom Halts Gas Supplies to Italy in Latest Energy BattleFed Begins to Split on the Need for Speed to Peak RatesIndonesia Suspends Football Matches as Riot Kills at Least 129Get Ready for Another Bear-Market Rally, Strategist Emanuel SaysUkraine Latest: US Sees Russ
A Bull Market Is Coming: 3 Beaten-Down Stocks to Buy Before the Recovery
The S&P 500 has been in a bear market since June 13. Smart investors know that every bear market has ended with the same result — a recovery rally. For instance, the bear market in 1949 reached its lowest level on June 13.
Investors expect no peace in U.S. stocks until bond gyrations subside
Investors believe the feedback loop between U.S. stocks and bonds will likely be a key factor in determining whether the gyrations that have rocked markets this year continue into the last months of 2022. With the third quarter over, both assets have seen painful sell-offs – the S&P 500 is down nearly 25% year-to-date and the ICE BofA Treasury Index has fallen by around 13%. The twin declines are the worst since 1938, according to BoFA Global Research.
Investor’s Business Daily
Bear Market Axiom: Flat Is Better Than Down
Investors suffered large and prolonged losses this year, begging the question: how much lower can this bear market go?
‘Fear Is Contagious’ as UK Crisis Boils Over Into Other Markets
(Bloomberg) — Most Read from BloombergGazprom Halts Gas Supplies to Italy in Latest Energy BattleFed Begins to Split on the Need for Speed to Peak RatesIndonesia Suspends Football Matches as Riot Kills at Least 129Get Ready for Another Bear-Market Rally, Strategist Emanuel SaysUkraine Latest: US Sees Russia Pullout From Lyman as EncouragingThe UK’s rapid descent from stability to crisis is threatening to expose the fragility of global efforts to crush inflation, raising the specter of chaos spr
Seeking at Least 16% Dividend Yield? This Top Analyst Suggests 2 Dividend Stocks to Buy
Inflation, interest rates, and recession – these are the bogeymen of investing, and they’ve been watching over our shoulders for the past several months. We all know the story by now, the rate of inflation is running at generational highs, the Federal Reserve is hiking rates in an attempt to push back against high prices, and that’s likely to tip the economy into recession. At a time like this, investors are showing a growing interest in finding strong defensive portfolio moves. It’s a mindset t
Bank of America Likes These Beaten Down Chip Stocks
Semiconductor stocks have tumbled in recent months amid flagging demand, with the S&P Semiconductors Select Industry Index dropping 36% year to date. Bank of America analysts recently discussed their favorite choices in the sector.