Dead cat bounce ?

 Paris June 4th, 2022

Despite a 1.63% drop yesterday, the S&P500 has recovered 6% form the recent lows. Does that mean that the Market is ready for regaining its previous highs and making new ones? Should you buy that dip?

Both the real economy and the financial system have entered a phase that is uncertain and destabilising for investors. Adherents to the classic portfolio split - 60% stocks and 40% bonds- have not had it so bad in half a century.

Both equities, usually dubbed as risk assets and the "risk-free" alternatives of government bonds have experienced large losses this year. In the traditional correlation between such assets, if stocks sold off, government bonds rose. That correlation has broken down as all assets (understandably) suffered from worries about higher interest rates and tightening financial conditions.

The worsening global economic outlook is also a problem. Downturn rob companies of actual and prospective revenue, leading to faster burning of cash reserves, increased debt burdens relative to equity and capital erosion.

Markets are undergoing a shift in operating paradigm from a seller's to a buyer's market. Indeed both are in the process of exiting a world of massive and predictable central bank liquidity injections that over-facilitated a seemingly endless flow of money into a smaller set of investment opportunities.

What lies ahead is a world in which the cost of money will be higher.

With time, genuinely  attractive value will be restored to Markets. The process of doing so, however, is likely to be bumpy.

Jean Jacques Chénier