Rowan Dartington’s Stephens: Fortune favours the brave … and the patient
Change for the better or ‘dead cat bounce’ – Rowan Dartington Signature’s managing director Guy Stephens examines causes behind last week’s market recovery.
We saw a little respite last week with the FTSE-100 rallying by 4.7% and posting five consecutive positive days. This is noteworthy because it is the first time this has happened since the end of July, after which we have seen nothing but weakness, turmoil and volatility. So what brought this about, and is it for real or is it a temporary interlude before normal service resumes and we plunge back down and below 6,000?
It is very easy to get consumed during times of extreme weakness and strength by the inevitable aura of doom or euphoria and forget rational thought. As human beings, the behavioural biases of fear and greed are a very natural reaction, but can lead to very poor investment decision making. It is important to examine what the catalyst was for last week’s move, and to decide whether something fundamental has actually changed for the better.
Unsurprisingly, the areas of the market that have recovered the most have been those which have been the weakest; namely, mining, commodities, oil and gas. The laggards have been commercial property, general retailers and leisure, which have all been beneficiaries of strong consumer spending resulting from the low oil price and also investment in property development projects with very low interest rates.
To us, this looks like a so-called ‘dead-cat bounce’ where temporarily the bears take a breather, close out some profitable short positions, and in low volumes, this can easily cause quite a strong snap back in markets. The main catalyst for this was a growing feeling that the US Federal Reserve Bank had not only missed its opportunity to raise interest rates in September, but it also seems highly likely that the third quarter US reporting season will see cautious statements looking forward couched in the China effect. The temptation for any Chief Executive to manage down expectations in the hope that they will be beaten is always irresistible, and when there is potentially the best excuse for at least five years, no doubt, China will be the biggest negative threat to earnings we have seen for some while.
This feature will mean that sentiment is likely to be negatively influenced over the next few weeks. It therefore follows that when the Fed gets to sit around the table and debate interest rates, it is unlikely that they will move in the face of a deteriorating business environment outlook. This was not lost on the market last week and expectations for the first interest rate rise have now moved out to next year.