Investors are eager to vent to the bottom of the market

For a minute there, at the beginning of this week, the markets sounded. . . What is the technical term? yes?

A brutal sell-off in stocks, which made the previous week the worst since the pandemic in the spring of 2020, turned abruptly. A US holiday on Monday kept a lid on trading, but Tuesday brought the rarest of things: a sudden bounce higher.

Perhaps under the influence of the cheerful sunshine that was flooding London at that time, one banker considered this a reason for rejoicing. “Give summer another chance!” He was enthusiastic on a note to customers. “Players want to buy stock again. Will it be more sticky this time? We’ll see.”

Reader, it wasn’t more difficult this time. Even the positive mood did not seep into the next Asian session. But the brief moment of euphoria reflects a sense that investors are growing a bit desperate at the horror show that is drawing to a close in the first half of 2022. Haven’t we suffered enough? After all, if you exclude the first quarter of 2020, this has been one of the worst seasons for global stocks since 2008. Surely it’s time for the champs to time the market to perfection and buy in?

On paper, yes, sure. “Valuations are starting to look attractive in a long-term context,” UBS global wealth management noted in its second-half forecast. “The historical relationship between P/E ratios and future returns suggests that it is reasonable to expect US stocks to produce 10 percent of annual returns over the next decade.”

But not yet, unfortunately. The week may end on a somewhat positive note, but a real turnaround in fortunes remains elusive. UBS, like many other investors, remains “neutral,” noting that there is a significant risk of further big declines from here.

Tatjana Bohan, deputy chief investment officer at French asset manager Topam, describes herself as an inherent optimist. “My glass of water is half full,” she says. But it is baffled by the desire to mark an end to the bleeding in the markets.

“I find that ridiculous,” she says. “Financial TV was saying ‘Markets are positive, we may be going through the worst.’ Are you kidding me? Why are you all of a sudden positive?”

She has a point. The war in Ukraine will not magically and quickly disappear. This will keep food and energy prices high and lead to strong inflation. Central banks are jamming interest rates higher, and investors aren’t deeply convinced that policymakers can avoid a hard landing – a euphemism for an economy meltdown – especially after their previous confidence in transitory inflation turned out to be misplaced. Even Federal Reserve Chairman Jay Powell has now admitted that a US recession is a “potential possibility”.

Quantitative tightening – the incorrectly named process of central banks offloading assets they’ve purchased to prop up the system in recent years – has just begun, and no one still honestly knows what it will mean. “It’s a huge debate,” says Peter Fitzgerald, chief multi-asset and macro investment officer at Aviva Investors. “Some people say these things are overpriced,” he says. “It’s never priced.”

In addition, Puhan is among those who believe that even after some big drops in stock prices, many investors are still not willing to part with the huge tech stocks that dominate the US market.

“They are still considered safe investments,” Bohan says. At some point, investors will properly exploit the downturn risk that you view as widely undervalued. And at that point, the highly stretchable elastic tape of market valuations could explode. She believes the markets could drop another 20 per cent before the end of the year. “It’s totally possible,” she says.

This isn’t an overly cheerful message, especially from a self-proclaimed optimist, and it may not be much consolation for investors — both individuals and professionals — keen to rebuild battered portfolios.

After the worst start to a year in three decades for bonds and one of the worst start for the S&P 500 in a century, says Kate Helou, chief investment officer at Russell Investments, she wants this reclassification to happen, and go to the other side.

This is partly because the “other side” is where you can get some deals and rebuild portfolios. “It’s a good time to think about ‘Where am I going to spread?'” she says. Plus, speed is a virtue in itself. “We want that to happen a little bit faster, while the balance sheets of consumers and businesses remain strong.”

This is the fund manager’s equivalent of having root canal surgery sooner rather than later. Yes, a simultaneous decline in risky assets is unpleasant, but if we can get it done quickly, markets may have time to stabilize before the financial padding that companies and households built up at the height of cheap money runs out.

Markets and real life don’t always move hand in hand – for example, the economic crash of 2020 coincided with a massive spike from March of that year onwards. Perhaps now, the markets can bear the burden. Embracing the pain may be the best way forward.

katie.martin@ft.com