Highly unusual movements on the US stock market yesterday are difficult to explain. While it is easy to say that the S&P 500 going from a 4% decline to a 0.3% gain in a single session was investors simply buying on the dip, nothing has changed in terms of the market headwinds. Therefore, we could be looking at a dead cat bounce rather than the start of a market recovery.
Russ Mould, investment director at AJ Bell, said: “The fact Asia was having none of it on Tuesday, with most of its major indices down sharply, suggests that risk appetite remains weak. Tensions between Ukraine and Russia appear to be getting worse, inflation and interest rate pressures are front and centre, and central banks are still in the very early stages of withdrawing stimulus measures and reducing liquidity.
“It’s hard to see what’s installed a sudden bout of confidence in investors unless they are simply judging share prices relative to recent highs and assuming they are now bargains following the sell-off. They might be overlooking the fact that a lot of stocks were priced too highly in 2021 so the current correction is deserved.
“The FTSE 100 remains an outlier in global markets due to the construction of its index. For years it was criticised for lacking exciting fast-growth tech stocks, that’s now worked to its advantage.
“Being dominated by ‘value’ stocks in the banking, energy and tobacco sectors means the FTSE 100 has been one of the best performing major indices globally this year.
“These sectors have been in demand because their stocks are cheap, the companies generate decent cash flow now as opposed to years into the future like many tech stocks, and they tend to do well in inflationary periods.
“In this environment, rising interest rates give banks the opportunity to make more money on loans, commodity prices tend to move up, and tobacco producers can push up their prices and customers tend to pay up because they are addicted to the products.
“The next big catalyst for the markets will on Wednesday when the Federal Reserve comments on its first policy meeting of the year. Expectations are for an interest rate hike in March and the market will be looking for clarity on how the central bank will shrink its balance sheet and reduce liquidity.
“Investors’ hands are already shaking after the bloodbath in equity markets so far in 2022 so that any aggressive moves by the Fed could cause a further sell-off among global shares. The central bank is fully aware it needs to act carefully, but equally it is unlikely to sit on hands given the inflationary pressures that need addressing.”