Stock and currency markets performance.
May has come and gone. Mixed amongst the negativity are some positive results:
On the currencies markets, the USD, which has held strong so far in 2022, gave back some ground against most major currencies in May:
So the landscape seems a little more calm than last month. This is also illustrated by the VIX, which measures volatility in the stock markets, being down 19% for the month (but up 57% for the year).
Inflation versus growth.
Inflation is still the key issue for determining performance when looking holistically at these numbers. April inflation figures in the US were actually down slightly from March, falling from 8.5% to 8.3%.
In last month’s blog, I wrote about the term recession and how its usage can be quite arbitrary. Certain measures / economic data can trigger this term being deployed.
A bear market is a term that you are likely to have heard, generally defined as when a market trades at 20% lower than its all-time high. As with a recession, this term can be open to interpretation, not least as there are many markets in the world and one sector could be in bear territory while others are actually fine, perhaps even in a bull market (the opposite of bear).
The Nasdaq has clearly breached these parameters, down over 27% since its high in November of last year. The enormous losses in value of tech companies illustrate how this sector is well and truly growling: for the year, Facebook down 42%, Snapchat down 70%, Netflix down 67%, to name but a few.
Over at the S&P 500, often the standard bearer, things aren’t quite as clear. During this month, the 20% decline was indeed breached on 20th May. However, since then the drop seems to have triggered a mini rebound with increases of 6%, bringing us nearer to market correction territory (-10%) than a bear market.
There have been 25 recorded bear markets in the US, of which 14 have been followed by a recession, with drops of 20.6% to 51.9% in the S&P. So it’s important to remember that the other 11 were NOT followed by recession.
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How should investors react?
So does the current situation offer us buying opportunities or value right now?
As is always the case, your personal situation will drive much of the answer to that question. Attempting to pick a bottom price on either a market or individual company is of course a futile exercise. Buying good companies at good prices is the key and these are certainly available right now.
Despite what is undeniably a difficult and unsettled global economic environment at the moment, with its many short term challenges, the consumer world continues to grow. The world’s population grows – it will reach 8 billion by the end of this year or beginning of next, compared to just 6 billion in 2000 and has doubled since 1975. Urbanization grows and businesses that are at the forefront of consumer spending (Unilever, Proctor and Gamble et al.) will ultimately drive growth based on the pure fact that more people are buying Magnum ice creams and Pampers nappies. More and more people are becoming connected to the internet, using Google to search for and buy consumer goods, and therefore growing these businesses.
So growth and life continue. The Chinese situation is somewhat perplexing and while these lockdowns and zero-COVID policies could drag them back a few years, life will eventually get back to normal, which means growth.
But, in the short term, this inflation issue is not going to magically disappear. We need the US Federal Reserve (Fed) and other central banks to get this right. Recent comments by Fed officials about beating inflation “at any cost” and increasing the Federal Funds Rate by 0.5% at all five of the remaining meetings this year (despite a month earlier saying that inflation was getting under control), do not fill me with huge confidence, since higher Fed rates generally suppress the economy while slowing inflation.
I’ve written before about the cost of housing in the developed world and overpaying because of cheap borrowing. If borrowing is no longer cheap, we could have housing issues on our hands again, where mortgages are unaffordable and homeowners are stranded with negative equity.
So, right now it’s all about Goldilocks principle – getting it just right.
Upon entering the Three Bears’ house, Goldilocks finds three bowls of porridge. The first bowl she tastes is “too hot,” whilst the second she finds “too cold.” The third is neither too hot nor too cold, it’s “just right, so she eats it.
The analogy rings true with inflation and interest rate policies. Cold porridge tastes terrible and for sure nobody wants to get burned …