MEDIA RELEASE: Signs of any durable bottom in equity markets are still some way off and investors should continue to position their portfolios to withstand a range of market conditions, says Talaria Capital Co-CIO Hugh Selby-Smith.

Selby-Smith says the recent market move is likely to prove a good example of a rally in a bear market rather than a sign of the market turning.

“Investors should be careful of interpreting such rallies as sustainable, as it is common to see these kinds of countertrends during the course of bear market declines,” he says.

“But I have also been around long enough to know that anything can happen, in which case I would encourage investors to build a portfolio that is robust in dealing with a range of outcomes.”

Selby-Smith says the recent move up in share prices was built on the idea that the US Federal Reserve might have turned dovish, combined with a US earnings season that contained few negative surprises.

However it is future earnings that investors should be looking to.

“The market has rallied in the face of an increasingly poor earnings outlook as bond yields have retreated. It appears market participants are convinced that the half-point fall from the highest core inflation in 40 years, currently at 5.9%, will encourage the Fed to “pivot” to lower rates in no time. Yet when core inflation is above 2.5% and the Federal Funds rate has been lower, the Fed has never shifted to easing unless a recession has pushed the unemployment rate toward 6% or higher.

“We would be unsurprised if the recent rally should prove short-lived, as we believe there is still some way to go in the current bear market.”

He says there are two key signals Talaria is looking for before it anticipates a durable bottom in equity markets, and neither seems particularly close at the moment.

“The first is when leading economic indicators trough, allowing investors to anticipate a recovery in the economy and corporate earnings; however at this stage there is no sign of this happening until at least the second half of 2023.

“The second signal is central banks changing to policies that support capital markets. But their first priority is controlling inflation so again, this seems some way off. 

“Every market bottom since 1950 has occurred within a month of one or both of these signals. In the meantime investors need to take steps to protect capital.

“However, as we have seen recently, this doesn’t mean there won’t be occasional strong recoveries in share prices, when indices go up against the long-term downtrend. This can be a good time for investors to rebalance their portfolios to take advantage of opportunities in the markets,” he says.