In late 2019 we suggested to our clients that we had had a good run and that it might be time to get a bit more cautious. The bull market that emerged from the financial crisis in 2008 had been going for 10 years with a few bumps on the way (Greek debt crisis, twice! Brexit vote, the Swiss central bank removing its ceiling against the euro, a 69% drop in the price of oil in 2015 and a crisis of confidence in the Chinese Shanghai composite stock market resulting in a 30% fall also in 2015) and as such strong runs typically last for no more than 10 to 12 years it was not unreasonable to suggest the cycle was almost complete.
Given that the world seemed to be in a reasonable place economically one could be forgiven for thinking that any pullback or correction might lead to a mid-cycle mild recession that would set up some great new investing opportunities for the next bull run.
Then along came Covid 19.
Global shutdowns in manufacturing and transport resulted in supply chain issues (perhaps the global switch to a ‘just in time’ supply process was not such a great idea after all).
Governments across the World issued free money to their residents – financial support designed to enable us to maintain a basic standard of living while we were working from home, if we were still working at all.
Put these two factors together and you very quickly end up with a problem, a big one.
As many people across the world suddenly found themselves with extra money, many of them decided to spend it and worry about living costs another day. A sudden increase in demand with a shortage of supply could only end in one way – inflation. As manufacturers and retailers incurred increased costs, they had to put their prices up, sometimes they put their prices up simply because they could.
When inflation rears its ugly head, interest rates must rise to try to get it under control. At the time there was much talk of inflation being transitory (it was only here because of the Covid spending bonanza and supply chain issues), but here we are three years after the start of the pandemic and inflation remains stubbornly high, in the UK, having increased again unexpectedly on the 22nd March 2023.
As you would expect, stock markets have been very volatile in this time, made more so by an increase in the number of private traders putting to use some of their stimulus funds in every way other than that intended.
So, by early 2022, we appeared to have dodged the recessionary bullet many thought Covid would bring but that conveniently ignored reality.
The stock market reaction to the pandemic at the beginning was broadly correct but markets were then boosted by the stimulus money and low interest rates which could not continue forever. As the free money was withdrawn in late 2021 and early 2022, people went back to their normal spending patterns and worse still, had now consumed much of what they needed in terms of refurbishing homes etc. So, spending reduced and many company’s earnings were obviously going to reduce significantly from those enjoyed in 2021.
By early 2022 we had reset to roughly where we were in late 2019, with some unwelcome additions – inflation, rising interest rates reduced spending and then Russia invaded Ukraine!
My point thus far is that as we now head into a possible recession, the global pandemic, while having a horrific effect on human life, appears to have simply delayed the inevitable as far as the economy and stock markets are concerned.
In 2013, Kerry Balenthiran wrote in his book “The 17.6-year stock market cycle” that he expected the present market cycle to peak in 2022 starting a two-year recessionary period with a new bull market and that seems to be playing out exactly as he expected.
So here we are.
There has been much debate over the last 18 months over whether we will have a recession. With the official definition of a recession being two successive quarters of declining GDP, the US and UK economies have escaped so far. Economies have remained stubbornly above recession levels and unemployment continues to be low as the world struggles to recruit the staff it needs across all sectors.
However, in mid-March of this year weakness in the US banking sector led to the collapse of Silicon Valley Bank (SVB) and in Europe Credit Suisse. SVB was the victim of some very bad banking decisions leading to it being unable to sustain heavy withdrawals due to a lack of liquidity and losses incurred on treasury bills. Credit Suisse had long been a troubled child in the banking world, again a victim poor management.
The collapse of two large banks immediately brought echoes of 2008 and fears of a systemic crisis, causing markets to over react to the downside, correcting slightly a few days later.
Both the US Federal reserve and the UK Bank of England are working very hard to reassure us that the banking system is stable and safe this time, but the markets remain nervous and uncertain, some would say unconvinced. As always, the fear is that which you do not yet know.
At the moment it seems that the market is waiting nervously – For proof that everything is ok, for inflation to fall, for interest rates to stop rising – all of which will come, but when? being the million-dollar question.
What next then?
When you don’t know what you don’t know, patience is the best thing you can have, let the market tell you the answers. Don’t be afraid of missing the boat, the beautiful thing about the stock market is that there are ALWAYS opportunities.
If you are already invested, a full and frank review of your portfolio would be a good thing to do right now. You need to make decisions about what you are invested in – don’t fall for the “it’s time in the market that matters” hype. Investors who bought Vodafone shares in 2000, 23 years later have still not recovered their losses – how much time in the market do you need exactly?
If you are not invested yet, now is not the time to jump all in, but you should be ready and enjoy the returns of interest on the cash in your portfolio without the volatility risk of heavy equity exposure. Sure, you can’t time the market, but there are better times to be an investor than others for certain.
As this year plays out, we will see answers to our investing and economic questions, and it will become obvious when you can consider being more aggressive with your investment approach.
We may yet see more banks collapse in the US, likely smaller ones but it’s possible and contagion may hit other larger banks but not in a major way as most are well capitalised. So, we need to see an end to the fear about banks and stability. We also need to see inflation stop rising and preferably falling. That will bring about an end to rising interest rates so the pivot or halt in rate rises is also key.
Overall, we want to see the economic picture look less gloomy before it starts to look a little rosy.
Markets themselves will normally anticipate improving conditions before they happen, so we should see things get better in global stock markets before the above all fall in to place.
For now, we are likely to see volatility continue this year with much potential for more downside but that will bring great opportunities to build your investments over the next bull cycle, possibly giving us another 10 years or more of growth.
After 38 years in this business, I feel I can safely say history does repeat itself so as we move through this current cycle towards its end, the most important thing is to protect capital and be well positioned for the next growth phase.
*Please Note: Past performance should never be used as a guide to potential or expected future returns. Investments in equity markets can be volatile and you may get back less than your original investment.