Will this dip in ASX shares turn into a CRASH?

During last month’s bloodbath, both the US and ASX shares touched the negative 10% threshold that qualifies the dip as a “correction”.

While both have bounced back in February to recover some of those losses, most experts agree there is plenty of volatility to still come in 2022.

So does this mean we will end the year worse than where we started?

Investment advisory house Wilsons this week tried to answer this dilemma with the release of its Corrections vs Bear Markets report. 

The Wilsons report acknowledged the current anxiety in markets.

“The hawkish shift in [US Federal Reserve] policy rhetoric is making investors nervous, particularly when it is occurring against a backdrop of a 40-year high in the US headline inflation rate,” the paper read.

“Investors are understandably concerned that the recent ‘short-sharp’ correction could morph into something deeper and longer.”

The Wilsons team then examined the evidence to try to work out whether the current dip would turn into a full-on crash or a bear market.

Why the signs don’t point to a bear market

The report judged that a correction is still “the most likely scenario” and that at the end of the turbulence we would still end up with an upward-moving market.

“The 12-month outlook remains positive.”

While that might be some relief for ASX shares, the paper far from guaranteed that the bumpy ride was over.

“It is, of course, very difficult to say if the recent lows are indeed the lows for this correction phase,” the Wilsons team stated.

“To the extent that the recent correction was both short and mild, even by the standards of bull market corrections, it is quite possible that we could have a lower low ahead of us.”

The report pointed to several signs that led to its conclusion.

The first is that bear markets generally accompany recessions in the US.

“US recessions almost always coincided with a ‘significant tightening’ of Fed policy,” the paper noted.

“[But] a tight policy backdrop is not currently in place. Policy is beginning to tighten but remains very easy.”

Looking ahead in a year’s time, monetary policy would still “likely to be on the easy side of neutral”, according to Wilsons.

“We will continue to watch for signs that challenge this thesis, but for now, we continue to see 12-month equity market prospects as decent.”

The great news for local shares is that Wilsons reckons prices are not yet ridiculous.

“Valuations outside the US actually look quite cheap in our view. We are overweight Australia and the rest of [the] world vs the US,” the report read.

“So, while parts of the US market are experiencing an overdue valuation unwind, we do not believe equities have a genuinely broad-based valuation problem.”

The post Will this dip in ASX shares turn into a CRASH? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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