Is the worst of the bear market over?

Whisper it, but the markets may have been through the worst already. Yes, inflation is more stubborn than the central banks had anticipated. And yes, Russia’s war on Ukraine, despite the recent setback, still rages on.

But there are timid signs that the global economy may be more resilient than previously thought, and it is possible that some parts of the financial markets are beginning to price this in.

Analysts at Societe Generale Cross Asset Research have revised upwards by 0.4 percentage point their estimate for global growth for this year, to 3.4%. This may not sound like a lot, but it matters – especially since it is not an isolated call.

After a year of falling continuously, consensus expectations for growth have bottomed and even started to reverse a bit, as economists were taken by surprise by the resilience of the global economy.

The world’s biggest economy and its engine of growth, the US, is resilient enough to withstand a recession next year, according to the analysts from Societe Generale.

Employment continues to increase faster than the growth rate of the working age population in the US, while wage growth, although lagging inflation, is still strong.

The analysts forecast that wages growth will be positive in real terms in the coming quarters. This strength means unemployment is likely to remain low.

Households still have not gone through all the savings they made during the pandemic (in 2020 and 2021) therefore consumption was better able to hold up in the currently negative economic climate.

Another positive surprise was Germany, where growth held up in the third quarter despite forecasts of a recession.

However, with winter only starting to bite, it is not yet clear what the effects of Russia’s war on Ukraine and consequent energy crisis will have on Europe.

Bull/bear indicator shows extreme bearishness

Stock markets have been hit hard by the economic slowdown and by central banks’ determination to raise interest rates in order to fight inflation. The S&P 500 has lost almost 18% year to date, while the STOXX Europe 600 is down almost 12% in the same period.

Still, bond markets have lost more, with investment grade corporate bonds and government bonds down around 18 percent. High yield bonds held up a bit better, having lost “only” around 14%.

Perhaps unsurprisingly for an asset class (if cryptocurrencies can even be called that) which still has to prove that it works as advertised, crypto assets lost 68.5% of their value since the start of the year.

Perhaps this has to do with the fact that their main advertised advantage – that of protecting against inflation – collapsed at the first real hurdle.

The Bank of America Bull/Bear Indicator, which measures investors’ sentiment, inched up a bit but is still in Extreme Bearish territory, meaning a Buy signal is still on.

Bull/Bear indicator
Source: Bank of America Global Research

This is the indicator’s first rise in nine weeks, and it was driven by improving flows into sovereign and corporate bonds, as well as better stock market breadth in the past weeks.

It is at its highest level since September and, in the Bank of America analysts’ view, it tells investors that “a fair chunk of the bear market rally is behind us.”

While it may be true that this particular bear market rally is behind, if the economy has priced in all the bad news that markets will have to deal with in the next year, it is very possible that stock market investors will make a comeback.

It all depends on whether inflation has slowed down enough to give central banks a reason to tone down their hawkish rhetoric.