The global rally in recent months has been material but is beginning to be tested with the Jackson Hole summit in Wyoming, starting today (25 August), set to dictate the future trajectory of stocks.

The key question facing investors is whether the moves we have seen since June represent a return to a bullish outlook or a so-called ‘bear market rally’.

In a recently published piece of research, Bank of America noted the average gain in 43 bear rallies (of more than 10%) since 1929 was 17.2% in 39 trading days. The most recent one is eerily similar at 17.4% in 41 days.

Driving the recovery in shares was a softening in US CPI inflation for July and a subsequent expectation of a pivot away from aggressive interest rate hikes from the US Federal Reserve.

In this context the words of Fed chair Jerome Powell on 26 August will be closely watched. He is widely expected to disappoint markets by suggesting rates may need to go higher and stay there for longer to control rising prices.

The release of the core Personal Consumption Expenditures index data, the Fed’s preferred measure of inflation, on the same day, may also help to determine investor sentiment.

The situation in the US seems somewhat brighter than the UK where inflation continues to run very hot and looks increasingly entrenched.

Traders on the money markets (the market for short-term loans) are pricing in an increase in UK rates to 3.75% by next May.

Given Bank of England data suggests UK households borrowed a net £1.8 billion in June, up from £900 million in May and largely on credit cards, a recession driven by weaker consumer spending appears increasingly likely.

Consumer sentiment in August plunged to its lowest level on record according to the latest reading from data provider GfK.

This paints a bleak outlook for consumer-facing businesses, particularly retailers. While ONS figures for July showed a surprise increase in UK retail volumes, up 0.3% versus a 0.2% decline in June, this was boosted by online discounts which will have hit companies’ margins.

Posh wellies seller Joules (JOUL:AIM) has predicted a significant loss for the first half of its current financial year. Sales of big-ticket items
look particularly vulnerable as people cut back and online furniture retailer Made.com (MADE) has revealed it is planning a potential emergency fundraise.

While spending on leisure time and travel may be prioritised for now, that may get tougher once the full impact of increased energy prices and borrowing costs come through.

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