The share market has been through plenty of volatility. Share prices went through a hefty decline between the start of the year and June 2022. But, many share prices are higher than the June level, even though interest rates have risen further.
It's worth asking the question – has the share market already bottomed?
For example, the S&P/ASX 200 Index (ASX: XJO) has dropped by 10.4% in the year to date. In June it had fallen by 13.6%.
The iShares S&P 500 ETF (ASX: IVV) is down 9.9% in 2022, but it was down 19.8% in June.
Looking at an individual name, the Wesfarmers Ltd (ASX: WES) share price is down 25.7% in 2022. But, in June it was down 30.6%.
There are many other anecdotes of similar recoveries from a bottom in June.
What could suggest whether a bottom has been reached or not?
Writing in the Australian Financial Review, Todd Hoare suggested "several things are missing for a viable low in equity markets". One example was that the Volatility Index, or VIX, has tended to see a spike closer to 40 before a durable market bottom has occurred, while this year's peak has been closer to 36.
He also wrote:
Earnings estimates likely need to fall as well. Costs are being challenged at the wages, inventory and soon the interest lines, while central banks are determined to lower aggregate demand (that is, revenue) to lower persistent inflationary pressures. To this end, the US reporting period will serve as a timely guide to the resiliency, or otherwise, of corporate profits.
He also pointed out that, historically, share prices have hit a low before earnings estimates reach a bottom.
An article originally written on Fool.com by my colleague Sean Williams pointed out that, in the past, when approximately 12% or fewer of all Nasdaq-listed shares were above their 200-day moving average then this indicator "helps recognise when those peak periods of pessimism arrive and are a signal for investors to pounce".
The bottom of the Global Financial Crisis was one of those times (5.23% of shares), the COVID-19 crash bottom was another (7.01%) and the latest one was June 2022 (8.81%). According to Williams, 22% of Nasdaq-listed companies were above their 200-day moving average on 17 October 2022.
My take on the share market situation
It's impossible to know whether there will be another bottom for the share market or not.
It may seem strange that some share prices are rising even though interest rates continue to climb.
But, I think that the market becomes most pessimistic during rough times when things seem the most unknown, not necessarily when things are the worst. It was around that time in June when central banks, such as the US Federal Reserve and the Reserve Bank of Australia (RBA) started ramping up interest rates at a strong rate. It seemed like a bad surprise, investors didn't know how high interest rates would need to go. Now things may seem closer to the peak for interest rates.
The situation seemed very unknown in March 2020 as the COVID-19 pandemic unfolded and the market bottomed, even though April was a more difficult month in terms of deaths. The central bank support for the economy probably helped as well.
I certainly think that profitability is going to drop in the second half of FY23 for many businesses, like retailers. But, I believe that June 2022 was the bottom for a number of ASX 200 shares like Wesfarmers and Brickworks Limited (ASX: BKW).
I'm certainly not predicting a rapid recovery of share prices though. I think higher interest rates are here to stay, so this will weigh on asset prices for a while until earnings start to seem like they're improving again.
