Mark Lister, 7 October 2022

I always have a list of things that worry me about the outlook, as well as one of more encouraging signs.

Right now, the first list is a little longer than I’d like, but it’s never all bad and the second list isn’t completely empty.

Here are five things that are on it.

If history is any guide, we’re past the worst.

Since 1960, there have been 12 bear markets (generally thought of as falls of more than 20 per cent from a recent peak) and/or recessions in the US.

During those times, the average peak to trough decline for the S&P 500 has been 32.1 per cent, and the average duration 12 months.

The US market finished September 25.2 per cent down from its peak, and it’s been falling for nine months. There could be more weakness to come, although history would suggest we're most of the way through this.

subscribe banner

Valuations look much better now.

One of the biggest gripes from investors in recent years has been the fact that everything looks expensive, and that it’s tough to find opportunities. Well, that’s started to change.

World shares are trading on a price/earnings ratio of 13.7, which is 28.1 per cent down from last year’s peak of 19.1 and 12.8 per cent below the 20-year average of 15.8.

This doesn’t mean markets couldn’t still go lower, and we’re not yet sure if analysts have been appropriately pessimistic when it comes to earnings estimates (which means the “e” in the ratio could be wrong).

However, that’s the lowest since 2013 and it counts for something.

There are signs of inflation softening.

Oil is sitting at around US$80 a barrel, 35 per cent down from early June and the lowest since early January.

At the same time, the New York Fed's Global Supply Chain Pressure Index has slipped to its lowest level since early last year.

This is flowing through to how businesses are behaving on the pricing front.

The National Federal of Independent Business asks small businesses in the US every month whether they intend to raise prices in the months ahead. After being elevated for most of this year, the proportion responding with a yes has fallen to a 15-month low.

Here in New Zealand, last month’s ANZ Business Outlook survey saw pricing intentions decline to the lowest since December 2021.

Sentiment is pretty awful at the moment.

The American Association of Individual Investors has been running a weekly sentiment survey since 1987, and for the last two weeks more than 60 per cent of respondents have said they’re bearish (which means negative).

That’s the highest proportion since March 2009, which just happened to mark the bottom of the post-GFC bear market.

We’ve seen a few of Wall Street’s higher-profile optimists also show signs of throwing in the towel recently too.

Nobody knows where the bottom is this time around, but it’s comforting when investors trade unbridled confidence for fear.

We’re entering a traditionally strong time of the year.

September lived up to its name as the weakest month for US shares as markets endured a brutal sell off, but seasonality is on our side for the balance of the year.

November and December are traditionally the strongest months of the year, while the December quarter is typically the most buoyant by a wide margin.

Since 1950, the S&P 500 has increased by an average of 4.1 per cent during the December quarter (compared with just 1.6 per cent for the other three), and it has been up on 79 per cent of occasions (a much better hit rate than 62 per cent for the rest).

There are plenty of challenges ahead, notably more interest rate rises and the eventual impacts this will have on consumers, businesses and the economy. We’ve also got the US midterm elections in November to get through.

However, with some of the heat having come out of the market and a few positive signs on the horizon, let’s hope the final stretch of the year makes for a more stable period.