Exaggerated Fear In The Markets

Chart of the Week

The chart shows that before a recession, stock markets often correct downward. On average since 1945, the decline has been 24%. Currently, the U.S. stock market has lost 34% since its peak last year.

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Why this matters

You might be wondering “what recession?”. And you are absolutely right. We are not in a recession, and any potential recession is still far off. Nevertheless, the markets are behaving as if a recession were coming. The market is afraid of something that has not even happened yet. This shows how excessively fearful the market currently is. Even a single strong economic data point showing that the economy is doing well could trigger a trend reversal.

Exaggerated fear in the markets...

The chart shows a monthly survey by Bank of America of the world’s largest asset managers (Fund Manager Survey). The biggest risk, according to professionals, is that central banks may raise interest rates too aggressively and thereby push the economy into a recession. We have written about this before and share this concern.

The chart from the same Bank of America survey of the world’s largest asset managers shows how they are currently positioned. The share of cash they are holding is very high, and historically, these levels have often coincided with a trend reversal. This time as well, buying by the world’s largest investors could lead to a change in trend.

This chart also comes from the Bank of America survey of the world’s largest asset managers. It shows how many respondents expect stronger economic growth in the coming months. The current level is lower than during the middle of the COVID crisis or the financial crisis.

Of course, there are many negative factors right now that are compounding— the war in Ukraine, disrupted supply chains, and fears of rising interest rates. Nevertheless, we consider the current level of pessimism to be exaggerated.
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…but no one wants to be the first to buy.

For the long-term development of the markets, economic fundamentals, earnings growth of banks, and central bank policy are decisive. In the short term, however, technical market analysis also has a significant influence.

The chart shows the performance of the NASDAQ Index. The U.S. index is also considered a barometer for the technology sector, as most tech companies are traded there. Technology stocks in particular have driven the market significantly lower in recent months. Since the start of the year, the index has been in a clear downward channel.

In the coming days, an important decision point is approaching: will the channel hold, or will the price break downward? The RSI (Relative Strength Index) indicates when a market is oversold and a potential rebound is due. This is currently the case, but it was also the case a week ago, and the market still dipped further. That is why technical analysts are currently uncertain.

The performance in the coming week could be decisive for market direction over the next 1–2 months.

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Disclaimer:

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