The dead cat bounce, or trend change
The quarter began with sharp upturns on both sides of the Atlantic, after a very trying September (the Dow Jones and S&P recorded their worst month since 2002). “The dead cat bounce” is an expression used in financial lingo when a small and brief recovery in asset prices occurs after a long period of decline. The expression can be traced back to Wall Street itself, derived from the idea that even a dead cat will bounce if it falls from a great height.
Is this what has happened this week, or is a long-lasting rally really going to occur? In all reality, things have not changed that much, as both Ismael García Puente, MAPFRE Gestión Patrimonial (MGP)’s fund selector and Alberto Matellán, MAPFRE Inversión’s head economist claim, at least from a macroeconomic point of view, which could indeed indicate that what we are seeing is a short-lived rally. In fact, PMI figures from various countries in the Eurozone, including Germany, have confirmed that what we are really seeing is smaller growth than what was forecasted for the rest of this year and the year to come.
However, there is a determining factor that does justify the optimism among investors, presenting a wide variety of opportunities for assets that have become very cheap: the intervention carried out by the Bank of England last week to stabilize the pound and the debt market. “The stock increases are a reflection of how the Bank of England’s intervention last week made investors more confident, who were worried about the massive withdrawal of liquidity,” pointed out Matellán in an interview for the program A Media Sesión, on Radio Intereconomía. “It's helpful to start the quarter off this way, mainly because we came out of September in such a horrible situation in terms of RV and RF as well as many trimesters in a row of losses in the two main markets. We’ll see how long this cause for joy lasts, even if the perspective hasn't changed,” added García-Puente.
In reality, the Bank of England has reminded investors that despite showing great concern over high inflation rates, central banks are going to continue responding to serious issues. And this has already had an effect on the dollar. “The dollar's safe-haven effect is decreasing, and risks are being taken in other currencies, like the euro or the pound. This should provide liquidity to the rest of the world,” added the head economist and MAPFRE Inversión.
So, what should individual investors do? García Puente points out that MAPFRE Inversión is not cutting down on its equity exposure, though it is modifying the miz of companies and sectors in its portfolio, from the cyclical ones to the most defensive ones, “reducing the portfolio’s beta.” “We've spent the last five years purchasing equity, and now that we have a more adjusted valuation it would be absurd to stop doing so, though in a defensive manner, of course, in sectors like health, consumer staples, or infrastructure. In other words, sectors with a low beta,” he added. For his part, Matellán reminded everyone of how important it is to work with a professional financial advisor so that you can take advantage of the opportunities that become available after the market's latest movements.