2022 has been difficult for many reasons. Not just because of challenged market and economic conditions, but also due to the fact that these challenges have come off the back of a torrid two years from the start of the COVID-19 pandemic. This year was heralded as the return to normality, yet at times it feels like there is as much uncertainty today as there was in 2020. Investors are understandably jaded and jumpy.

However, we do believe there does become a stage where sentiment in markets reaches such a low point that the most material surprises are likely to be on the upside.

Sentiment is at record low

Given the relentless negative press on global economic conditions and the markets, trying to find any positive views is challenging. This is reflected in sentiment indicators that have now hit record lows.

	University of Michigan Consumer Sentiment Index		OECD Consumer Confidence Index1
1.	Jun 2022	55.31	Sept 2022	96.463
2.	Jul 2022	56.97	Aug 2022	96.464
3.	Nov 2008	61.17	July 2022	96.467
4.	Aug 2011	61.73	June 2022	96.669
5.	Feb 2009	62.28	Jan 2009	96.704

Source: Bloomberg, OECD, Janus Henderson Investors. Data runs from January 1987 to 30 September 2022.

 

It takes a level of courage to start considering an opposing market view. Yet we feel that this is an avenue worth exploring for investors who have the risk tolerance to accept volatility in the immediate term.

The best long-term investment entry points rarely occur during times of market exuberance but can be found during periods of deep declines and low market confidence.

It is important to note, however, that we can’t say where the bottom of the market is – no one can. In this current market environment, there are simply too many variables. As such, there remains a strong chance that markets could decline further.

However, what we do know with certainty is that markets go through boom-and-bust cycles.

If we go back to the sentiment indices shown in the previous table and remove 2022 from the equation, it is interesting to see what happened to equity markets in the subsequent one and three years from these low readings, as shown in exhibit 2.

Exhibit 2: 1- and 3- year global equity return following worst sentiment indicators

	University of Michigan Consumer Sentiment Index			OECD Consumer Confidence Index
	Base month	1-year return	3-year return	Base month	1-year return	3-year return
1.	Nov 2008	+29%	+33%	Jan 2009	+33%	+48%
2.	Aug 2011	+6%	+44%	Feb 2009	+51%	+73%
3.	Feb 2009	+51%	+73%	Dec 2008	+27%	+29%

Source: Global Equities Returns as measured by the MSCI World Index, excluding 2022. Bloomberg. OECD. Janus Henderson Investors, as at 30 September 2022.

 

While we are looking at very few data points, and therefore must be cautious with drawing conclusions, what we do see is that in all but 2011, global equities recovered materially with 12 months, and all produced strong 3-year returns.

Historically, there has been a clear link between confidence levels and equity returns. At the time of this writing, the Confidence Index is declining at a slowing rate, which has yet to be reflected in equity market returns.

Where to from here?

In many of our recent client consultations, the Janus Henderson Portfolio Construction and Strategy (PCS) team has been hearing of a universal fear of markets, a desire to remain “risk off,” and, in some cases, “closing up shop” for the rest of the year.

However, when we look through history, environments such as these have been the critical moments where being brave as others flee have presented the best buying opportunities. That is not to say markets will suddenly recover – markets may well continue to struggle. But at some point, that will change. Time will tell whether we are at, near, or some ways away from the bottom of the market. But what we can say with certainty is that markets always recover, and right now we are an awfully long way from the top.

IMPORTANT INFORMATION

Investing involves risk, including the possible loss of principal and fluctuation of value.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.