After an abysmal first half of the year, the last thing investors expected was for US shares to shoot up by about 20 per cent over the summer, yet that is what happened.
A quick glance at the headlines would suggest investors had gone mad, backing stocks while the world stumbles from one calamity to the next.
War, heatwaves, drought, social unrest, rocketing prices and rising interest rates should have had investors ducking for cover, rather than falling over each other to buy shares.
Yet, the US S&P 500 somehow jumped 17.4 per cent from 3,666.77 on June 16 to 4,305.20 on August 16, leaving it just 10 per cent behind January’s opening of 4,796.56.
Investors even started buying into Bitcoin again, driving the price from $18,948 to $24,461, and amused themselves by toying with meme stocks.
Central banks are likely to have been watching the madness with concern, fearing that investors have missed the memo warning that the days of loose money are over.
This could force the US Federal Reserve and others to flex their muscles by hiking interest rates and reversing bond purchases at a faster rate than they originally planned.
On Friday, Fed chairman Jerome Powell made it clear in his speech at Jackson Hole that the US central bank will prioritise beating inflation over protecting growth.
“We remain a long way from the position where rates can be brought under control," Joshua Mahony, senior market analyst at online trading platform IG, says. "For investors, there is a risk that we could embark upon another period of weakness, with recent buoyancy fading into a distant memory."
What we witnessed is a classic bear market rally, Chaddy Kirbaj, vice director at Swissquote Bank, says.
Traders and investors rushed to buy the first-half dip, but may have overdone it.
Many investors developed unrealistic expectations.
“Wall Street is betting that the Fed will start cutting interest rates in 2023, but we think this is the wrong move,” Mr Kirbaj adds.
Even if the Fed cuts rates early next year, it is hardly grounds for optimism. More an admission that the economy is in an even worse state than investors realise.
Mr Kirbaj urges traders and investors to stop following market movements and focus on what really matters.
“By which I mean corporate earnings, the yield curve, interest rates and economic growth — not just stock price movements,” he says.
“Look at factors such as earnings per share, the price/earnings ratio and dividend yields, rather than market sentiments, which can shift in an instant.”
After the bull market run of the past dozen years, some investors continue to believe the fun can last forever, David Morrison, senior market analyst at Trade Nation, says.
A feature of the bull run was that bad economic news was treated as good news for stock markets, because it meant even looser monetary policy.
Now, investors are banking on signs of slowing growth in the US, China, Europe and the UK will stay the Fed’s hand on rate rises, Mr Morrison says.
They have also seized on signs that inflation is slowing, falling from 9.1 per cent in June to 8.5 per cent in July, as a sign that it has peaked in the US.
“If it has, then equities and cryptocurrencies could have further to rally in the final quarter of 2022.”
Mr Morrison expects the Fed to raise rates from today’s range of 2.25 per cent to 2.5 per cent to as high as 3.75 per cent to 4 per cent by year end.
“It will then pause through the first quarter of 2023 before gradually reducing borrowing costs. I consider that a potentially bullish outcome.”
Traders and investors must stop following market movements and focus on what really matters
Chaddy Kirbaj,
vice director at Swissquote Bank
Stock markets have not totally disconnected from reality, though. The summer has delivered a second positive surprise, Colin Leggett, investment director at asset manager Collidr, says.
“Corporate earnings have been relatively robust over the past few months, despite soaring inflation, increased energy costs and falling consumer confidence.”
Investors have been looking past today’s problems, viewing them as short-term issues, which could disappear next year, but they may be making a mistake.
“Investors need to ask themselves whether the highest inflation in decades has really been priced in by markets,” Mr Leggett says.
It may not have fed through to companies’ reported results. We will only know in a few months what the impact is on current and future earnings, he adds.
“Seeing as markets have already bounced strongly, investors need to be aware that there are still a lot of risks ahead."
Market sentiment remains at the mercy of the Fed, but Mr Powell has failed to deliver clarity over monetary policy, Jeremy Batstone-Carr, European strategist at advisory company Raymond James, says.
“Markets have been left to interpret for themselves if the Fed is dovish or hawkish, at a time of significant uncertainty.”
The danger is that markets have misread the Fed’s intentions, expecting easing when they will get tightening.
If that has happened, autumn could be tough as the Fed tries to make up for its past misdemeanours.
“As energy prices threaten to spiral out of control, we are likely to see rate hiking continue, a move that will crush demand and deepen and extend a possible recession,” Mr Batstone-Carr says.
The Fed is struggling to reverse 20 years of excessively loose monetary policies, Mike Hollings, investment director at Shard Capital, says.
“It has fostered a culture of dependency as investors and economies have become reliant on constant monetary stimulus.”
As inflation takes off, central banks are caught in a trap of their own making. “Raising rates in an economy that is now so reliant on easy money risks causing either a market crash or a recession, or both,” Mr Hollings says.
The Fed must belatedly take steps to reassert its credibility, but “it is seemingly unable to stand up to the monster it has created”, he adds.
The outlook remains bearish, which means that defensive and inflation-resistant sectors are a go-to for investors, Vijay Valecha, chief investment officer at Century Financial, says.
“Generally, defensive industries deal with necessity goods whose demand is relatively less sensitive to price changes. The consumer staples, utilities and health care sectors tend to be non-cyclical, meaning they can produce stable profits through all phases of the economic cycle, with steady revenues and high dividends.”
Mr Valecha tips three exchange-traded funds that can help you survive the volatility.
His first pick is First Trust Consumer Staples AlphaDEX Fund, which invests primarily in the healthcare and food and beverage sectors.
“It has generated a return of 15.19 per cent in that last year and 13.75 per cent over three years, plus an annual yield of 1.2 per cent,” he says.
His second tip, iShares US Healthcare Providers ETF, has returned 5.8 per cent over one year and 19.62 per cent over three years, and currently yields 0.6 per cent.
Finally, Invesco S&P 500 Equal Weight Utilities ETF, has a yield of 2.15 per cent and has returned 15.9 per cent over one year, or 10.4 per cent over three years.
If this winter turns out to be far rougher than the summer, these defensive ETFs could help investors weather the storms ahead.
Australia tour of Pakistan
March 4-8: First Test, Rawalpindi
March 12-16: Second Test, Karachi
March 21-25: Third Test, Lahore
March 29: First ODI, Rawalpindi
March 31: Second ODI, Rawalpindi
April 2: Third ODI, Rawalpindi
April 5: T20I, Rawalpindi
Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
The five pillars of Islam
1. Fasting
2. Prayer
3. Hajj
4. Shahada
5. Zakat
COMPANY PROFILE
● Company: Bidzi
● Started: 2024
● Founders: Akshay Dosaj and Asif Rashid
● Based: Dubai, UAE
● Industry: M&A
● Funding size: Bootstrapped
● No of employees: Nine
Killing of Qassem Suleimani
Volvo ES90 Specs
Engine: Electric single motor (96kW), twin motor (106kW) and twin motor performance (106kW)
Power: 333hp, 449hp, 680hp
Torque: 480Nm, 670Nm, 870Nm
On sale: Later in 2025 or early 2026, depending on region
Price: Exact regional pricing TBA
Some of Darwish's last words
"They see their tomorrows slipping out of their reach. And though it seems to them that everything outside this reality is heaven, yet they do not want to go to that heaven. They stay, because they are afflicted with hope." - Mahmoud Darwish, to attendees of the Palestine Festival of Literature, 2008
His life in brief: Born in a village near Galilee, he lived in exile for most of his life and started writing poetry after high school. He was arrested several times by Israel for what were deemed to be inciteful poems. Most of his work focused on the love and yearning for his homeland, and he was regarded the Palestinian poet of resistance. Over the course of his life, he published more than 30 poetry collections and books of prose, with his work translated into more than 20 languages. Many of his poems were set to music by Arab composers, most significantly Marcel Khalife. Darwish died on August 9, 2008 after undergoing heart surgery in the United States. He was later buried in Ramallah where a shrine was erected in his honour.
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Family: Mother of eight children and has 10 grandchildren
Favourite traditional dish: Al Harees, a slow cooked porridge-like dish made from boiled cracked or coarsely ground wheat mixed with meat or chicken
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How to get exposure to gold
Although you can buy gold easily on the Dubai markets, the problem with buying physical bars, coins or jewellery is that you then have storage, security and insurance issues.
A far easier option is to invest in a low-cost exchange traded fund (ETF) that invests in the precious metal instead, for example, ETFS Physical Gold (PHAU) and iShares Physical Gold (SGLN) both track physical gold. The VanEck Vectors Gold Miners ETF invests directly in mining companies.
Alternatively, BlackRock Gold & General seeks to achieve long-term capital growth primarily through an actively managed portfolio of gold mining, commodity and precious-metal related shares. Its largest portfolio holdings include gold miners Newcrest Mining, Barrick Gold Corp, Agnico Eagle Mines and the NewMont Goldcorp.
Brave investors could take on the added risk of buying individual gold mining stocks, many of which have performed wonderfully well lately.
London-listed Centamin is up more than 70 per cent in just three months, although in a sign of its volatility, it is down 5 per cent on two years ago. Trans-Siberian Gold, listed on London's alternative investment market (AIM) for small stocks, has seen its share price almost quadruple from 34p to 124p over the same period, but do not assume this kind of runaway growth can continue for long
However, buying individual equities like these is highly risky, as their share prices can crash just as quickly, which isn't what what you want from a supposedly safe haven.
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Score
Third Test, Day 2
New Zealand 274
Pakistan 139-3 (61 ov)
Pakistan trail by 135 runs with 7 wickets remaining in the innings
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