Skip to the content

Invesco’s Hooper: Six reasons to be bullish despite the gloom

04 October 2022

Overly pessimistic investors, supportive central banks and well behaved bond yields are also glimmers of hope.

By Matteo Anelli,

Reporter, Trustnet

Outlooks for the remainder of the year are bleak, but the situation at the end of the third quarter could have been a lot worse than it was, according to Invesco’s global market strategist Kristina Hooper, who said there are reasons to be cautiously optimistic.

In the three months from July to September, equities and bonds plunged while commodities, which had a good run since the energy crisis, also finished lower thanks to a strong dollar and weakening global demand.

The end of the quarter overshadowed what started off with a mini-rally in July (a flick of the tail from June’s market rebound), according to Hooper.

Some parallels are now being drawn to the global financial crisis, with the return of quantitative easing in the UK and questions over whether a 60/40 portfolio is useful in the current climate.

“This environment is weighing down sentiment in an extreme way, and it’s only human nature to react to the panic that we’re hearing from all those around us,” said Hooper.

Yet here she offers some positive thoughts in this difficult environment, showing that there are silver linings among the darkest of clouds.


High bearish sentiment precedes rallies

To start off with, bearish sentiment is at record high, which for Hooper could shed a positive light on equities in the coming six months.

According to a survey by the American Association of Individual Investors’ , 60% of savers were bearish in late September, the highest level since the 70.3% of March 2009 and the first time since its inception in 1987 that it has remained above 60% for two consecutive weeks.

Yet, despite the fear, if history repeats, Hooper suggested now could be a good time to keep an eye out for a US market rally.

“Why do I call high bearish sentiment a positive sign? Historically, the S&P 500 index has had above-average six-month returns following unusually high bearish sentiment readings,” she explained.


US treasury yields don’t speak of a hard recession

The second reason to keep optimistic is US Treasury yields don’t seem to be predicting a deep recession. The inversion in the two-year/10-year US Treasury yield curve spooked investors as, historically, it has been an indication of coming recessions.

But Hooper preferred to look at the three-month/10-year curve, which “is considered to be just as accurate a predictor of recessions and not only has it not inverted yet, but it has actually widened modestly since mid-September”.

This is a positive sign according to the strategist as, while it does not guarantee there will not be a recession in the US, it does suggest that it is not necessarily a fait accompli.

She added that it might also mean that “even if we do enter a broad recession, it may be relatively shallow.”


High yield spreads are still relatively well behaved

Hooper also took solace from Bloomberg data on encouraging high yield spreads. The ICE Bank of America US high yield index option-adjusted spread and the ICE Bank of America Euro high yield index option-adjusted spread are still “well below their peaks for the year despite significant economic headwinds facing Europe”.


Inflation expectations are easing

The New York Fed Global Supply Chain Pressure Index sheds a positive light on ebbing inflationary pressure, while inflation expectations are also easing.

The University of Michigan Survey of Consumers showed US consumers’ five-year inflation expectations decreased to 2.7% (the lowest since July 2021) and one-year ahead inflation expectations lowered to 4.7%.

“This could encourage the Federal Reserve to become less aggressive in tightening, which would likely help moderate the US dollar rally and ease some of the pressures globally.”


Growth estimates continue to fall

“Bad news is sometimes good news,” said Hooper, and lower growth – in particular lower new orders – testify that the central banks’ tightening agendas, which aim at cooling down the economy, are working.

Demand is the only component of inflationary pressures that the central banks can arguably control, so seeing it dampening could be encouraging.

In this regard, Hooper went as far as to say that “a worse-than-expected US employment report this Friday would likely be greeted positively by markets,” as it could encourage the Fed to make “even a subtle pivot”.


Government institutions have proved responsive

Lastly, government institutions continue to show a willingness to respond to major crises and work pre-emptively to avert them.

“Whether they want to admit it or not, government institutions have risen to the occasion as backstops when truly needed,” said Hooper

This happened during the pandemic on the part of so many governments and more recently we have seen the Bank of England temporarily abandon its quantitative tightening efforts in order to buy gilts and bring down sky-high yields.

“What we have learned in recent years is that in the face of serious crisis, restoring financial stability will likely trump other central bank goals such as controlling inflation,” she said.

Editor's Picks


Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.