Oliver’s Insights – Shares may have bottomed

November 16th 2022


Key points



At last, it seems some of the bad news for shares appears to be abating. It’s certainly been a rough year. Thanks to a combination of high inflation, hawkish central banks, a surging US dollar, war in Ukraine along with other geopolitical tensions and rising recession risks, bonds and shares have had poor returns. It’s been the rise in inflation that has been the key driver. From their highs, late last year or early this year to their lows in October US and global shares fell around 25%. Australian shares held up better thanks to strong resource earnings & a less hawkish RBA but still fell 16% to their low in June and held just above this in October. Bonds which are normally a source of stability in the face of share market falls have had their biggest losses in decades as rising inflation pushed yields up. Tech stocks and cryptocurrencies, being amongst the biggest winners of easy money and the pandemic lockdowns, have been amongst the biggest losers from monetary tightening and reopening, with crypto land still in turmoil.

But, from their recent lows, global and Australian shares are up 10% or so. In fact, Australian shares are now only down about 4% year to date. Shares may have run a bit ahead of things in the near term as they often do, but the big question is whether the rebound is sustainable.


Some better news

Bear markets are known for having periodic spikes higher as investors’ short positions are squeezed, often after a bit of less bad news. In the tech wreck and GFC, bear market rallies were up to 20% or so. And of course, we have seen two bear market rallies into March and August that proved short-lived. But this time there’s been a more fundamental improvement:

shares bottomed 1
Source: Bloomberg, AMP

What’s more, the proportion of CPI components with annualised monthly inflation above 3%yoy is falling sharply.

shares bottomed 2
Source: Bloomberg, AMP


This is all consistent with falls in our Pipeline Inflation Indicator due to easing supply constraints, freight rates, commodity prices and cost pressures in business surveys. This Indicator correlates more with goods inflation (which is slowing), but this leads services inflation so its likely to slow too. A year ago global growth, US wages, rents, commodity prices, US public spending, anecdotes, car prices, money supply growth, freight rates and business surveys were all pointing up for US inflation. Now they are all slowing, or clearly pointing down.


shares bottomed 3
Source: Bloomberg, AMP


Inflation in Australia is lagging behind the US by around 6 months, so it should start to decline here from early next year as well. And Australian shares take their directional lead from the US most of the time anyway.

shares bottomed 4
Source: Bloomberg, AMP
shares bottomed 5
Source: Strategas, Bloomberg, AMP


There is a rising chance we have seen the low in shares and we remain optimistic on shares on a 12-month horizon as investors will start to focus on monetary easing from late next year and then economic recovery.


What are the risks?

There are four main risks:

What about the latest problems in crypto land? Bitcoin has fallen to a new cycle low on liquidity issues at FTX crypto exchange (now bankrupt). Cryptos were a beneficiary of easy money and have been suffering from its withdrawal. Financial accidents are common outcomes of Fed tightening & the crypto problems could go further. This may be bad for crypto traders but its unlikely to have a major impact on global growth and share markets as investor and financial system exposure to it is relatively low. Its good news for gold though as the crypto craze was sucking the life out of it.


Concluding comment

The ride for shares may still remain choppy & new lows can’t be ruled out. But the increasing evidence of a peak in US inflation and central banks slowing their rate hikes along with positive seasonals & the track record of US shares rallying after the mid-terms indicate we may have seen the low and add to our confidence that the next 12 months will be positive for shares. The same is also likely to apply for the $A, being a cyclical currency.


If you have any questions about this please get in touch with us.

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About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting or likely affecting all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.