By Michael O’Connor

Three weeks of negative market numbers have ensured the positive rally we experienced to mid-August is now but a distant memory.

The assumption that the improving inflation figures we saw in early August would allow the Fed to take their foot off the gas pushed markets higher, but these notions were swiftly put to bed by the Fed, killing the market momentum in the process.

Instead, investors are now gripped by fears of the aggressive policy tightening to come.

So, where does that leave us?

In short, it leaves us in the most prolonged bear market since the Great Financial Crisis.

I have spoken about this before, but it bears repeating. The unbridled support that fuelled previous recoveries is no more. The rescue team that saved us from the burning building in recent years has now turned against us.

Like some sort of arson-obsessed firefighter, the Fed has turned to the dark side, seeking lower prices, lower valuations and more subdued economic activity in an effort to tame inflation.

As such, the probability of a fast recovery fades dramatically.

Investors got used to spending a lot of time near all-time highs over the last decade, but the landscape is changing.

The S&P 500 has not been within 5% of its all-time high for the past 95 days, the longest period since 2013.

The Nasdaq 100 has now spent 33 weeks below its 40-week moving average, the longest period on record.

There is no denying the downtrend we are in and waiting around for the cavalry to arrive is no longer a justifiable investment plan.

Slower growth is still growth, but expectations need to be managed.

Just as painful

Markets are never defined as good or bad - they are judged merely as better or worse.

What has already happened holds far less weight than what’s about to happen.

With market conditions worsening, the fact that they are retreating from an unsustainable level of success bears little significance for investors suffering through the pain in real-time.

For example, a 7% drop in property prices would undoubtedly be met with resounding disdain from property owners despite house prices jumping 40% in the past 18 months.

Before the most recent real estate rally, investors would have bitten your hand off for a 30% increase in their property value in under two years, but you can never view the two in isolation.

Psychologically, the previous unrealised gains have already been locked in. Who wants 30% when 40% was just on the table? The pain of loss has now been anchored to the new highs.

Nothing else will do

More importantly, it’s never how far something has fallen but the uncertainty around how further it could fall that gnaws at the mind of investors.

So, while a reprieve from some of the most supportive market conditions in history may seem reasonable, investors will undoubtedly feel every bit of the pain along the way, regardless of the good times they experience to get here.

The short-term adjustments are never easy, but the long-term trend rewards those willing to take the pain.

Market outlook

For now, I expect markets to continue to move sideways in the absence of a significant catalyst. A return to a sustainable bull market is unlikely until we see a stabilisation in interest rates.

Inflation and labour market figures continue to be the ones to watch.

For free weekly stock tips and direct access to my personal investment portfolio, go to www.theislandinvestor.com.