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Are stocks cheap enough yet?

Tong Kooi Ong and Asia Analytica
Tong Kooi Ong and Asia Analytica10/20/2022 06:36 PM GMT+08  • 11 min read
Are stocks cheap enough yet?
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US stocks staged a remarkable turnaround rally on Thursday, Oct 13. The Dow Jones Industrial Average fell nearly 550 points at the opening bell in an immediate knee-jerk reaction to hotter-than-expected inflation numbers. The global bellwether index then proceeded to recoup all lost ground, and far more, to close up 828 points. It registered a historic 1,508 points trough-to-peak intraday rebound — all for an ugly inflation report!

Market analysts scrambled to provide the narrative for this apparent contradiction. Some suggested that the huge price surge was due to traders closing their positions, having sold ahead of the inflation data release. Indeed, all three major indices — the Dow, S&P 500 index and Nasdaq Composite — had been declining for several straight days and hit their lowest levels in a year last week. Perhaps, some investors were bargain hunting, betting that the higher-than-expected inflation rate means it is near peak and, if so, the worst of rate hikes may be behind us.

Regardless, the huge swing seems to be a portent of even greater volatility to come. And in fact, the Dow closed broadly lower the next day, giving back about half of Thursday’s gains. But the question as to whether US stocks are near bottom, after this year’s selloff and precipitous valuations decline, is one that we too are asking ourselves. The answer, after considering various factors, is not yet, we suspect. And probably by quite a far distance.

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