Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest

INVESTORS are dipping their toes nervously back into the markets this week after last week’s interest-rate shock sent shares tumbling by nearly 6%.

Where next for the bear?

The S&P 500 is down 25% year to date. It’s been a shocking first half and that’s before company earnings have started to reflect deteriorating economic conditions. It’s all been about falling valuations, with investors pricing in a growing threat of recession.

Last week’s 0.75 percentage point hike in US interest rates was followed by rises in the UK and Switzerland. There’s no question that rates are going higher, only how far they will go and how fast. In other words, will central banks break the economy before they get on top of rising prices. The Fed had stuck to the line that it could deliver a ‘softish’ landing, but last week it dropped its promise that the labour market could ‘remain strong’ as it raised rates. This is going to hurt.

But have markets already priced it in?

Markets move ahead of the economic reality so the fact that we are getting real about the economic cost of fighting inflation may have already been factored into share prices. The ratio of companies trading at new one-year lows to those at one-year highs - minus 48% - is typical of the bottom of a bear market, but some way off the minus 80% readings during the financial crisis and at the start of the pandemic.

And the sell-off has been indiscriminate. Even in the energy sector, benefiting from a high oil price, the number of shares trading above their average for the past 50 trading days is back at March 2020 levels. Sometimes things look so bad they might actually be good.

Time to buy the dip?

With many household name stocks having fallen much further than the market averages, contrarians are starting to get interested. When we looked recently at the 800 or so US stocks available on the Fidelity platform, nearly 100 of them were showing a fall of at least 50% since the start of the year. The Scottish Mortgage Investment Trust, which invests in many of the technology stocks that have led the market lower, is 49% down in just six months. It trades at a discount to the value of its assets of 16%. The average over the past three years is less than 1%.

Does the Scottish Mortgage sell-off present a buying opportunity?

None

Source: Investing.com, share price from 16.5.21 to 16.5.22

These facts alone do not mean that the market could not fall further. We have not experienced a capitulation, when investors turn their back on the markets completely. But the odds of a decent return from here are significantly better than they were six months ago.

On the radar this week

After the interest rate excitement, it’s thinner pickings this week. Recession watchers will focus on Purchasing Managers survey data from both the US and Europe. Here in the UK, Friday brings retail sales numbers.

Five year performance

(%)
As at 21 June
2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Scottish Mortgage Investment Trust plc (SMT) 33.6 -2.8 50.3 55.8 -43.6
S&P 500  13.1 4.2 7.9 35.5 -13.0

Past performance is not a reliable indicator of future returns

Source:  Refinitiv, 21/6/22

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The shares in the Scottish Mortgage investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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