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Weekly Indices Review - 21 December
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Historical performance does not guarantee future profits
The UK 100 has managed to post a decent recovery in Q4 and has posted yet another Santa Rally. To put this move more in perspective it is often useful to zoom out and see the last longer term gains and losses.
On this chart we can see how the index recovered since the pandemic crash early in 2020. However, unlike the US indices, it has only managed to move back to levels trading pre-pandemic before finding resistance. The US 500 for example has powered on to post fresh all time highs early in 2022.
In comparison the UK 100 remains rather lacklustre and has fallen out of favour of international, and even domestic, longer term investors, still trading well under its own all time highs.
The 2022 Q4 rally has at least been able to lift price action up towards the pre-pandemic highs once more. Can this be sustained?
That clearly will be the major question for 2023. The bond market has been long suggesting a US recession is looming, with the inverted yield curve. Very few economic forecasting tools have the positive track record of the yield curve inversion, so the question for many is just how bad the recession will be when it comes, not if it comes.
The Federal reserve is still fighting inflation, can it afford to aggressively cut rates as it has done in the past recessions? Probably not, and as a result a number of “zombie companies” may yet file for bankruptcy. These companies have been able to survive in recent years with cheap borrowing costs, but as interest rates and inflation hit, and with a probable recession ahead, they could finally run out of runway. Leaving major headwinds for equity markets for the year ahead.
As a result doubts do remain on how much further equity markets can go until we have more clarity on the size of the expected recession ahead. So we can see recent buyers in the UK index tempted to take profits around these levels, as fears are mounting that at some stage in 2023, peak recession, we may very well be trading under the current relative highs.
