Like most of the year, global markets have had more negative than positive days in recent weeks. However, there has been a significant change in the behavior of the equity market over the past few days. It is most likely not a sustainable change in a negative trend. However, it was surprising and something to pay attention to historical precedent.
The US consumer price index (CPI) for September was released last week. Unfortunately, it was not only higher than expected, but higher than the previous month. The “core” measure, which includes food and energy prices, rose to a 6.6 percent pace year-on-year, a new high in a decade. Although only one data point, its release no doubt disappointed investors who had been looking for a further slowdown in pricing pressures after data over the summer suggested the peak of inflationary pressures may have passed. . Overall, the stability of inflation should encourage central banks to stay on their rate tightening paths.
The equity market’s reaction to another set of disappointing inflation data? A significant reduction initially, in line with what investors would expect. But, something unexpected happened after that. After the initial drop, equity markets reversed course sharply and finished much higher. In fact, it was one of the biggest “intraday reversals” (when the market starts higher/lower and ends lower/higher) for the US market on record. Bonds responded in a similar way, although not as strongly. Overall, it was a surprise that caught most investors off guard as markets reacted poorly to high inflation readings during most of the past year.
There is no fundamental explanation for this recent change. Furthermore, it is only one day and may be an anomaly. In fact, on the next trading day the financial markets gave back much of the gains! But, the one-day pop underscored some important historical market lessons from previous bear markets. First, when investor sentiment is near a peak, there may be a lack of sufficient sellers to meaningfully lower prices. Second, some of the biggest daily stock market returns can happen at the most challenging times, when investors least expect it. Finally, equity markets often bear bad news, expecting future improvement.
Having said this, it is probably too early to focus on a sustainable recovery in the financial markets just yet. After all, the ongoing economic slowdown is expected to accelerate in the coming months as a meaningful tightening of financial conditions works its way through the global economy. Ironically, that could solve the inflation challenge that markets have been grappling with all year, which could help us finally get closer to an inflection point in the market. Meanwhile, financial markets will no doubt turn their attention to the third quarter earnings season, which has now officially begun.
This article was contributed by Mike Candeloro, Senior Portfolio Manager and Wealth Advisor with RBC Dominion Securities and head of the Mike Candeloro Wealth Management Group. RBC Dominion Securities Inc. are separate corporate entities. and Royal Bank of Canada, which is affiliated. CIPF member. Mike can be contacted at Michael.firstname.lastname@example.org or on his LinkedIn page. You can also visit his website at www.michaelcandeloro.com