After more than a decade of near uninterrupted growth, investors were shaken from their complacency in January of this year by a sudden and sustained fall in the market.
In hindsight (always the ideal but unavailable investment tool) the reasons were obvious. Inflation was proving persistent – where previously it was believed to be “transitory”.
Central banks had been too slow to act and were now desperately trying to regain the initiative. They were pushing interest rates up rapidly which impacted the expected future returns of many darlings of the stock market.
Then Putin invaded Ukraine and sent further shockwaves through the economies of the world, as the cost of fuel and food rocketed upwards.
Once a stock market index falls by 20% from its peak, it is described as being in a “Bear Market”. If it rises by 20% from the trough, then it is described as being in a “Bull Market”. Bear market conditions were swiftly registered by most major indices in the first quarter of 2022.
With inflation rising, interest rates rising, the war continuing, and China still clinging to its “Zero Covid” policy, it seemed to most observers of the markets that the only way was down.
The average person, who might not regularly read the financial news, would be forgiven for thinking that by August, the fall in the markets had simply continued.
Too late to do anything about it, so best to just close your eyes and ride it out now.
They would therefore be surprised to learn that the US market (specifically the S&P500, which other markets tend to follow) rose by 9.1% in July alone.
Its best month since November 2020 and its best July for more than fifteen years.
That growth continued into August. While the market is not yet in Bull territory, the Bear market is technically therefore over.
So was that it?
Has the market correction now happened? Have we seen the bottom and now the market simply rises again from here?
From where we stand I’m afraid to say that I think that’s unlikely.
There are just too many headwinds for the global economy.
Central banks in particular appear to have developed an almost manic determination to regain control of the situation with ever higher interest rates (regardless of the fact that most of the causes of inflation are “supply-side” aka “cost-push” and therefore unaffected by interest rates).
The practitioners in financial markets are most adept at their use of language (often to help sell stuff, for example “this bond is not junk, it’s high yield!”)
If the rise in the markets in July and August turns out to be a brief respite in a downward trend, they would describe that as “a dead-cat bounce”.
While not particularly pleasant (the trading floor in my day was a true bear-pit), the idea of the market mimicking an unfortunate moggy making its final fall from a great height, is certainly evocative.
So if this is only a brief respite in otherwise continuous market fall, what should you do?
I would suggest that as we can’t know where the market will actually go from here, such a recovery is not the time to make a major reassessment of your strategy.
That said it could be an opportunity.
All portfolios have a couple of holdings for whom the long-term prospects might not be so bright now.
These could be the firms who depended on cheap funding and had not achieved profitability yet. Some of these have been termed the “meme stocks”. Trendy but perhaps built on shaky foundations.
These are the stocks that have typically fallen the most this year.
The recent rise in the market could present a valuable opportunity to exit these positions, or at least trim the position.
Other than this the (perhaps temporary) end to the bear market should not alter your long term strategy of regularly adding to your portfolio and thereby taking advantage of dollar/cost averaging.
Equities have proven to be the best performing asset class over the last hundred years or so. For all the problems that the world faces right now, I see no reason for that to change.
Disclaimer: This communication is purely meant as information for general interest. It is in no way to be taken as financial advice or relied upon in any way for investment decisions.