If my aunt had b”’s she would be my uncle

The well-documented fall in stocks in June, in keeping with most of the year so far, took something of a breather at the start of the week. We did highlight the Vix index fell last week, which is unusual when stocks take a turn for the worse. This gave a little bit of encouragement that something of a rally may be in the offing. Most stock market commentators will more than likely put this down as a relief rally in a “bear market”, and they may well be right. There was nothing particular to suggest a bounce was on the cards, no particular piece of good news.

In the next couple of days, Jerome Powell will be facing Congress. The tin hat we referred to recently may well need to be worn once again as he looks to deflect some of the likely flak as he defends the decisions of the collective members of the Federal Reserve for the handling of the current economic situation. Whatever the Fed did he was likely to take criticism, raise more aggressively, as they have done and risk an economic recession, stick to their stated path and risk inflation running hotter.

At the start of the year, with few dissenters, the general opinion amongst economists was that the Fed will tighten but rates will still be low relative to history and gains in stocks will continue, and rates will be next year’s problem. Party on! Clearly, the market took a different view. Now the consensus appears to be, we should hunker down, US interest rates will rise farther than we anticipated, faster than we anticipated, earnings will fall and stocks will continue to follow. That may be what happens, but when consensus takes over one has to think what are the possible alternative scenarios.

The rally this week has been by all those sectors that have been hardest hit so far this year, tech and consumer discretionary in particular. We know stock markets get to the problem far quicker than analysts do as investors balance risk and reward better.

For nothing more than a hypothetical debate, supposing prices did start to fall faster than expected. We see how quickly oil prices can fall during economic downturns as increased supply meets falling demand. The Fed’s tone would change quickly, and that bear rally could become something more. History tells you the odds of buying after a 25% correction are in your favour over the following couple of years. There is also plenty of reason to think things may get worse before they get better, the point of this commentary is not necessary to rush and buy, but to beware of consensus, the market has often already gotten there.