As with most of the year, global markets have experienced more negative than positive days in recent weeks. However, there was a notable change in equity market behaviour in recent days. We are not convinced it marks any sustainable shift in trend. Nevertheless, it was surprising and something we pay attention to given historical precedent. We describe this in more detail below.

 

The U.S. consumer price index (CPI) for the month of September was released this past week. Unfortunately, it was not only higher than expected, but higher than the preceding month. The “core” measure, which excludes food and energy prices, rose to a pace of 6.6% year over year, which represents a new multi-decade high. While it is only one data point, its release undoubtedly disappointed investors who were looking for a further slowing of pricing pressures after the data during the summer suggested the peak of inflationary pressures may have passed. Overall, the persistence of inflation should incentivize central banks to remain on their rate tightening paths.

 

The equity market’s reaction to another string of disappointing inflation data? A substantial decline initially, in-line with what investors would have expected. But, something unexpected happened thereafter. After the initial fall, equity markets sharply reversed course and finished meaningfully higher. In fact, it was one of the larger “intraday reversals” (when the market starts off higher/lower and finishes lower/higher) for the U.S. market on record. Bonds responded in a somewhat similar fashion, albeit less emphatically. Overall, it was a surprising development that caught most investors off guard given how poorly markets had responded to high inflation readings throughout most of the past year.

 

There’s no fundamental explanation for this recent turnaround. Moreover, it’s just one day and may turn out to be an anomaly. But, this development left us reflecting on a few learnings we have gleaned over the years, which are all related to some extent. First, when investor sentiment is near an extreme, there may simply be a lack of enough sellers to push prices meaningfully lower. Second, some of the largest daily stock market returns can occur at the most challenging of times, when investors least expect it. Finally, equity markets often bottom on bad news, in anticipation of future improvement.

 

We think it’s too early to focus on a sustainable recovery just yet. After all, the economic slowdown, which is underway, is expected to intensify in the months to come as the meaningful tightening of financial conditions works its way through the global economy. Ironically, that may solve for the inflation challenge that markets have been grappling with all year, which may help get us get closer to an eventual market inflection point. In the meantime, we plan on shifting our attention to the third quarter earnings season, which has now officially kicked off.

 

Should you have any questions, please feel free to reach out.