We’re clearly in a bear market and a recessionary economic cycle. I still think this is going to be a multi year difficult macro environment mainly due to inflation. After a decade long QE bonanza , the game has simply changed. CB’s are not propping the stock markets anymore. The great resignation, record employment, CAPE valuations or the crypto speculation, it’s just when the cycles reverse. Doesn’t mean the stock market is dead, it’s just not going to be as easy as it has been for so long and many businesses will fail. Many others will also prosper or do just fine, it’s just that valuations are coming back down to earth and they can stay there for a very long time. One mistake that many investors make, is comparing a share price relative to where it was 12 months ago. Just because the sp fell 50-70% from its highs, doesn’t necessarily mean the stock is cheap. It could stay cheap and become even cheaper for a very long time.
The main risk is that CB’s will raise too fast and too much which in turn will cause an even worse reaction from the markets. My view is that this downturn will be a slow and protracted one and for now, the markets have priced in too much downside risk. Most of the LSE co’s reported trading in line and positive outlook. I think this will be the case for the best part of this year because the consumer is still strong, the job market is healthy and despite all the scary news, it will take time for the real economy to falter. Some 75% of mortgage holders in UK are on a fixed tariff for the next 2 years so higher interest rates won’t have an immediate impact. In fact, all this scary news will have a net positive effect on consumer because people will mobilize, prepare and spending will end up being a lot more resilient than anticipated. Folks will just spend more wisely and more selectively and on things that matter to them, with less wastage. On the other hand, CB’s will also have to fight harder ( or longer) to combat inflation, so I think this will be a protracted tag of war between CB’s and consumers, with inflation slowly retracing but remaining relatively high for the next few years.
Also I think whoever wanted out is out already as the sentiment is literally on the floor, there may still be some “structural” institutional selling though. Last Nov I gave up and went 100% cash and kept that level to at least 50% ever since. It did help a bit as my long term pf is “only” flat ytd and the trading account up 12%. I’m getting closer to fully invested again . Could be all wrong and the markets could sell off even further, especially if the FED makes the mistake to raise too much, too fast. I don’t think it will be a V shaped rebound either, but the markets have priced in too much of the bad news already and they have to wait for those earnings to confirm the pessimism. There is a decent chance we are in the process of making the lows for this year and although Mr Market is trying to discount future earnings as far in advance as possible, I just can’t see earnings getting that bad this year.
Let’s not forget that in the short term the market is driven by events, but in the long run, quality always prevails.
The show must go on, keep calm and buy the dip.