Investing in the stock market in 2022
Commentary on the movement of world stock markets is varied and almost always designed to be either sensational or dismissive. Sometimes it is amusing and often very wrong – take the example where a well-known TV market commentator said in March 2008 – “Bear Sterns is fine, do not take your money out, Bear Sterns is not in trouble, Do not move your money from Bear. That’s just being silly. Don’t be silly.” 5 days later the share price of Bear Sterns collapsed from $62 to $2!
I also remember a conversation with a colleague at a large investment manager who said “ looking at Lehman brothers, I can’t see that it is that bad, it just can’t be that bad” – that was a week before Lehman brothers collapsed.
We have to remember that Wealth Management advisers and Investment managers all have a view based on their own interpretation of current market activity, in conjunction with their own investment style and own self interests in retaining your invested capital. It is also important to remember that the stock market exists because of a disagreement – party A believes the shares in a particular company are overvalued and have no further growth left in them, so they want to sell them and party B believes that those same shares are undervalued and that further growth is a strong possibility, so they want to buy them.
So why am I about to comment on the state of the stock markets, given that you probably should take my thoughts with a pinch of salt too? Because I try to add a different dynamic to market commentary – being realistic.
One of the Investment Management industry’s favourite comments is “its time in the market that matters not timing”. That’s fine and I accept that market timing to perfection is nearly impossible, but there are better times than others to be making new investments and sometimes it’s better to sit in cash on the side-lines for a while.
“Time in the markets” ignores the fact that it may not be convenient for you as an investor to wait for another 3 to 5 or 10 years while your ISA, portfolio, Bond, or other investment product recovers from a significant fall.
What if you planned to retire in May of this year and were invested evenly in the Zurich Emerging Europe equity fund, the Artemis smart GARP UK equity fund, the SW Bailie Gifford North American Pn CS8 fund and the OMR Quilter Investors Equity – you would find your funds DOWN in value over the last 12 months by -75.5%, -52.4%, -45.6% and -28% respectively!
That would be a huge blow to your retirement plans, so being told “don’t worry, its time in the market that matters, hold on for the long term and it will be fine” will not provide much comfort.
Our investment strategy is based on capital preservation, maximising growth in the good times and being more cautious when things don’t look so great, so we don’t believe in this oft pedalled adage, we try to be more realistic.
So, what is going on in the stock market right now?
To put things into perspective, we need to look back a little to early 2020. No-one knew Covid would be as bad a thing as it turned out, but you could see that world stock markets were struggling for direction and conviction. The most likely reason for this was that by that time we had had the pleasure of an 11-year bull market as the world recovered from the financial crisis of 2008 and the business and economic cycle was naturally coming to an end.
Economies had expanded, employment was high, inflation low and interest rates low. The economic shock of the Covid lockdowns caused an immediate fall in world stock markets, but surprisingly the main indices recovered very quickly as the new “Work from Home” companies like Amazon, Netflix, Peloton, Microsoft and Apple etc soared and propped up the markets as the airlines, travel and leisure industries collapsed.
However, the unexpected massive global government stimulus especially in the UK and US caused a substantial increase in retail spending and many companies like Amazon saw sales in 2020 and 2021 that they could not hope to repeat in 2022 when that stimulus stopped as it inevitably would.
What came next, as a natural course of action, was a substantial increase in inflation, causing a need to raise interest rates to try to calm the economy down.
So naturally, as per the economic cycle followed by global economies and markets for the last 200 years, we have a threat of going into a recession. As yet the recession has not been officially recognised (we need 2 successive quarters of falling GDP for an official recession) but I think it is coming, although I think it will be a light mid-cycle recession.
I say this because it is only natural that we should be where we are now, but it is not really that bad because we still have a good economic background – low unemployment, strong consumer demand – so we are possibly in the middle of a delayed mid cycle recession/pullback that we should have had at the start of 2020 before Covid came along.
This is what I mean about being realistic, after all the free money given out by the government, public spending would naturally increase, this would naturally cause inflation when partnered with the Covid fallout and trigger rising interest rates, causing the perfect storm.
What makes things seem so bad now is our short-term memory. For the last 11 years we have lived a charmed economic life with prosperity rife in many world economies for many people, so many of whom have no living memory of having a mortgage or bills to pay in hard times or recession (how many of us can remember mortgage interest rates at 11%?).
It will likely get a bit worse before it gets better, rising interest rates will continue until inflation comes under control. Typically, it takes about 9 months for inflation to peak as interest rates are increased so that should take us to the end of July 22. After that it can take around 9 months to see inflation fall to acceptable levels and interest rates to start to come down again so that takes us to around April of 2023.
Current market conditions are challenging but as inflation peaks, we will likely see a return to focus on the quality and profits of companies and likely see a stronger finish to 2022 with markets up slightly or level on the year, repairing some of the damage done so far this year. After that, a steady return to growth in 2023 should see a slightly better year and I believe from 2024 onwards we will see a return to global growth as the full economic cycle runs to completion over the following 10 to 12 years.
So, what should Investors do now?
If your shares or ISA, Unit trusts or ETF’s are down in value significantly you should review them carefully and make some hard decisions.
If you have a strong tech exposure and hold companies like Telodoc, Tesla, Netflix, Peloton etc you may want to consider cutting your losses if you are not prepared to wait 5 to 10 years to see a return to 2021 levels if some of them ever make it back there. ( I know I will enrage the haters for saying bad things about Tesla, but you seriously do have to consider whether it has matured as a share and seen its best price increases for a number of years to come. Vodafone – a world leader in mobile technology took 6 years to grow 894% to £4.97, collapsed in early 2000 and has never traded above £3.01 since, languishing today at £1.26 as I write today and yet it remains a world leader in mobile technology and service provision. If you bought it around the 11th October 1999 you would still be nursing a 67% loss today. If you bought Tesla last year at a $1,000, today you are still down by 26%. I hope I’m wrong on this one for all the Tesla lovers out there).
In the middle of adversity lies opportunity
Any correction in the stock market creates a great opportunity for investors, when fear persists it’s time to be brave, but it’s a stock pickers market. Don’t be one of the millions of investors who picks their investments based on what did well last year – that was last year, there is no guarantee it will happen again.
Now could be a great time to start investing or add new money to the markets. Many funds and shares are on sale, and this could be the time to position yourself well to make significant profits over the next few years.
Stock Market 2022 Summary
Be realistic – if something falls 50% in value, it must grow by 100% to break even – and that is unlikely to ever happen in most cases. Review your investments, cut your losses, and position yourself for the future.
Be brave – most investors do it the wrong way round – buy at the highs and sell at the lows. This is a time to invest carefully while fear persists – we don’t get more than 2 or 3 opportunities like this in any 10-to-12-year period.
Take an active view of your investments – don’t languish in the markets and hope for the best sometime in the future.