The big sell-off might be on pause for now, but investors should stay cautious. Photo / AP
We're already in a bear market, says Pie Funds chief executive Mike Taylor.
"I think you have to call this a bear market, whether it has got there on a technicality or not."
A bear market is technically defined as a fall of 20 per cent from peak to trough.
The big sell-off of tech stocks saw Wall Street's Nasdaq hit that mark and the S&P 500 touched below 20 per cent on an intraday basis, Taylor said.
"It is possible we've hit a low, for the moment. I'm not saying 'the' low but sentiment was extremely bearish."
After a big sell-off through to late May there were now signs that markets saw inflation slowly coming under control, he said.
But we may yet see another wave of selling as companies get to grips with higher interest rates and slowing economic growth.
It didn't have the headline-grabbing single day crash of some other bear markets but this year's slump has been one of the worst in decades for successive weekly falls, said Taylor.
In fact, Wall Street's Dow Jones Index saw eight successive weekly falls, making for the worst run since 1932.
"The market was down week after week, relentlessly," Taylor said.
"You had investor sentiment, the put-call ratio at extreme levels, you had safe-haven demand and a number of stocks trading below 52-week highs," he said.
"All of that pointed to a market that was extremely bearish. Often when that happens even when the bad news keeps coming we get a rally and that's exactly what we've had and the last part of May has been very good."
Markets had taken some comfort from the US Federal Reserve and other central banks talking tough and the belief they will get on top of inflation is there, he said.
"We have seen the US 10-year rate - which got to a high of 3.2 per cent in mid-May - come back under three.
"That's sort of an indication to me that markets are saying maybe that longer-term inflation is under control."
Recession was still a risk, but that wasn't necessarily a disaster, Taylor said.
Starting from a level of very full employment meant consumers were well placed to weather the downturn.
"I think where this recession will hit, if we're going to call it that, is in corporate profits. It's an earnings depression."
Because businesses had to lift wages and fuel and other costs were up, margins were shrinking.
But overall demand was probably not changing that much, he said.
"Normally when a company guides to lower earnings, stock prices fall," Taylor said.
"They often say that when a company comes out and cuts estimates and then rallies you've probably reached the bottom. So that's something to look out for.
"But I think at the moment earnings have not been revised down and I think that's still to come."
Markets tended to bottom out going into recessions, not once we had come out, he said.
"We are not in a recession yet so there is still more data to come out and so I think for the moment it's still time to be cautious."
Inflation won't keep rising at 8-10 per cent per annum and that will be partly because we'll be cycling through to a point where oil was already over US$100 a barrel.
Second-quarter earnings in the US were still to come and so we'd likely see some "confessions" about earnings outlook late June and early July.
"By that point we'll start to see how rate rises are impacting the consumer," Taylor said.
"There's a big jump [in rates] coming - we don't really know how the consumer is going to behave."
But we had likely seen the larger part of the big sell-off.
"There's been a lot of baby out with the bath water," he said.
"So, if you can be discerning, you should be able to buy high-quality companies at a reasonable price, which you couldn't do last year. Just be aware there still might be another wave down."
- The Market Watch video is produced in partnership with Pie Funds.