Mixed messages
From oversold to complacency?
Summary
Global Equity markets have rallied strongly over the past two months. There have been 7 rallies since the peak in equity markets in November 2021, three of which (including this one) have stood out as being particularly strong. The current rally, so far, is similar to the March and July/August rallies, albeit fractionally stronger than either, although the broad pattern is the same.
With the recent rally there are signs that investor complacency has returned. The VIX index provides a guide to the expected volatility (or risk) priced into the US equity market. When it is elevated, as it tends to be during sell-offs, then it suggests that risk aversion is high. Over recent weeks, with the rally in the equity market, the VIX index has fallen to below 20. In our view this is suggesting that equity investors are complacent about downside risk in coming months.
The equity market has moved in opposite direction to the VIX, and with the VIX back below 20, it suggests that investors have become complacent through November.
Source: Bloomberg, Artorius
All the rallies so far this year have petered out and have been followed by new lows. The rallies have generally been fuelled by the hope that the US Federal Reserve is coming to the end of the monetary tightening period, or at the very least the worst of the interest rate rises are behind us.
In the short term, equity markets are likely to continue to be driven by expectations on interest rates. If the US Federal Reserve remains hawkish, expect the latest equity rally to fail and for new lows to be reached. A realisation that the Fed is close, or even at, peak rates could add fuel to the fire, short term, for the equity market.
All expressions of opinion reflect the judgment of Artorius at 12th December 2022 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.