The S&P/ASX All Ordinaries Index (ASX: XAO) is pretty much flat today, down 0.2% in early afternoon trading on Tuesday.
However, one expert says the bear market may be coming to an end, but there is also cause to remain bearish.
In a column on Livewire, chief investment officer at WealthLander Jerome Lander presents both sides of the coin.
Lander writes that "since I started WealthLander at a time of irrational exuberance and extreme bullishness in January 2021, this is the best period I've seen to make a case for a new bull market in equities".
Lander also says "the bear is still here today", and explains why current market conditions might persist. He adds "it is essential to have a balanced and broader perspective, and not be all in or all out of cash".
'If it feels uncomfortable … this is the time to invest'
As Lander explains:
Investors are bearish, and no one wants to invest. Many active managers are down 50% or more from their highs in 2021 and have suffered heavy redemptions. Numerous market indicators indicate extreme bearishness. If it feels uncomfortable to invest right now, that's precisely why this is the time to invest – before it gets more comfortable.
The reasons to be long-term bullish are based on two underappreciated factors, according to Lander.
1. Central banks may soon be forced to give up on "tightening financial conditions aggressively". Lander says: "… underlying inflationary pressures are already easing and the economic outlook is rapidly deteriorating".
Says Lander:
Interest rate hikes have to stop at some stage because vast amounts of unproductive debt mean that unless central banks want widespread defaults and a deflationary economic collapse … they have to eventually err on the side of tolerating some inflation to whittle away the debt through nominal inflation and currency (cash) and bond (fiat) depreciation (in real terms).
2. Many assets are worth buying on valuation grounds now. Lander says: "It is easy to find suitable long-term value in markets today, even when many other assets remain overpriced."
Lander says his company prefers "to take a medium-term outlook with a more inflationary bias, backing the case that central banks are about to slow or cease their current trajectory …"
We hence see supply starved commodities as good value already with a strong fundamental medium-term outlook. We are warming to equity positions; particularly should we see signs of real market capitulation and/or policy change.
… investors are likely better off investing something now or gradually easing in than not being invested at all or being late once a policy change is effected.
The case for a continuing bear market
Lander nominates two reasons why the bear market might continue.
1. We are heading to a recession and "Central Banks are making a huge policy mistake — continuing to tighten into a recessionary and stagflationary environment (potentially for political reasons but also because currently, inflation appears out of control)".
Lander says:
Long-term inflationary expectations are not high. Yet Central Banks are committed to imminent hikes and will hike – as they have in every other cycle – until something big breaks.
Furthermore, we should rely on current central banks being backwards-looking, unreliable and making huge policy mistakes – as they have persistently demonstrated in recent years!
Lane says investors are still heavily allocated to risk assets, even though they feel bearish, and "may hence be about to capitulate — deciding to redeem in mass when there are one too many interest rates increases …".
2. Bear markets that coincide with recession "are usually longer and larger than a simple 20% drawdown, averaging about 33% losses".
Lander explains:
Many investors have been conditioned to using the last 20 years of data rather than considering the stagflation of the 1970s, the post-war supply-side constrained 1940s, or the early 1990s Australian recession when considering the derating potential of market valuations in an inflationary environment. Indeed, losses could eventually exceed 50% in worst-case scenarios.
To sum up, Lander says the bull case relies on central banks to pull back on rate rises. The bear case relies on central banks to continue hiking rates "despite the mounting evidence they'll kill the economy".
He says: "Both have a case; hence, the outlook is nuanced and unsuitable for any extreme positioning."
