Investment Clock insights

What will turn the equity market?

Trevor Greetham

29 September 2015

With sentiment still extremely depressed, like many people we are having a team discussion on possible catalysts for an equity rebound.

Ian Kernohan groups possible candidates into two broad categories:

Economic/corporate data
1. Signs of stabilisation in China
2. No real signs of stabilisation in China, but evidence that China isn’t impacting data in the US and Europe
3. Earnings season suggests worst fears exaggerated – yes some companies hit by China industrial slowdown but China consumer ok and US/eurozone domestic demand actually improving

Central Banks
1. Further easing by the European Central Bank (extended September 2016 deadline), People's Bank of China (PBOC) and Bank of Japan (BOJ)
2. A marked shift in Federal Reserve (Fed) rhetoric

First to note, you don’t always need a catalyst. It is the nature of positive markets that they grind upwards with low volatility, rising more days than falling. That said, with this degree of stress in the system there is usually something that gets the positive mood started with a sharper rally from the lows.

We are a bit concerned that the US Federal Reserve’s language linking their decision not to raise rates with stock market weakness is unhelpful. Saying they still expect to hike discourages buyers, who are incentivised to sit on the sidelines waiting for a market weakness to force a more accommodative stance. Arguably it also caps the near-term upside for stocks in the sense that a rally will be met by a rate hike and potentially more fall out in the emerging markets and commodities.

What the Fed should be doing at this stage if they want to hold fire is to focus on inflation expectations factored into the US bond market. The Fed’s own measure is flashing a clear deflationary warning sign with the current level well below those which prompted quantitative easing moves in the last decade (chart below). Sadly, the New York Fed’s Bill Dudley yesterday once again discounted this indicator, blaming poor liquidity for the abnormal reading.

The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.