April 2022 Market Update:
Are we heading for recession?
"The stock market is a device for transferring money from the impatient to the patient"
Stock and currency markets performance.
April has come and gone and the monthly stock market indices figures are pretty grim:
Data table is from Google Finance
As is always the case during periods of volatility, the currencies markets performed well against the safe haven of USD, where cash is parked. April saw some of the largest monthly increases I can recall, positive across the board:
Data table is from Google Finance
April did not turn out to be a springboard for share prices, following an already tricky start to 2022. With the exception of the FTSE, which benefits from tracking large oil companies, all markets were down, most noticeably the S&P, which fell over 10%.
As was the case when we were experiencing month-over-month growth in the S&P due to the increase in value of the large cap technology companies, the scale of the index’s fall can be partly attributed to Facebook (Meta) and Amazon’s share prices falling by 40% and 27% respectively. Markets always overreact to large fluctuations and the current volatility is causing drops which provide value, especially in the aforementioned shares.
Are we heading into a recession?
Are we heading into a recession? Or are a range of complicated factors – interest rate policy, high inflation, Ukraine war – causing this period of volatility and sell-offs?
A quick Google search of the question revealed very different answers: “A major recession is coming” and “We’re not going into recession.” So clearly the answer is that nobody knows the answer.
A recession is a “significant decline in economic activity spread across the markets, lasting more than a few months and normally visible in real GDP, real income, employment and industrial production.”
Although GDP did decline by 1.4% for the first quarter of 2022, unemployment remains low and economic activity is increasing rather than declining, as we make our way back to normality. Supply chain bottlenecks continue to cause issues with production and the Chinese lockdown policies are stifling the return to normal, but the majority of the world is in a much better place than it was a year ago and certainly much better than it was two years ago.
How should investors react?
So, my view is that the declines are more short-term than the kind of long-term declines we would see in a recession. Whether it takes a month, three months or the rest of this year before we see a return to growth, I dare not predict of course, but tried and tested investment strategies such as remaining patient, buying low and utilizing dollar cost averaging all make sense right now.
Two years ago, an investment in a simple S&P index fund would have returned you 45%, even though the markets had already rebounded from their bottom in March 2020. The mini crash the markets experienced then created great buying opportunities. Those with a cool head and the ability to see past the noise took advantage and have been rewarded.
The drops in 2022 are not as significant as 2020, but they do provide opportunities for those investors with a similar disposition.
