Market Update for October:
Who Wins In Volatile Times?

BY CRAIG MCAVINUE – NOVEMBER 2ND 2022

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.”

Peter Lynch

Stock and currency markets performance

October came to an end and we saw a positive month for developed markets, while emerging markets continued to struggle. All being said though, a good opening month to what is historically the best performing quarter.

Data table is from Google Finance

A mixed month for the USD, but the year-to-date results show the greenback remains very strong, illustrating once again the importance of having some USD as part of your portfolio.

Data table is from Google Finance

We live in uncertain times

Whether you are bullish and see value in this market or bearish and feel the worst is still to come, one aspect that everyone involved in finance cannot dispute is that we are in a period of great volatility.

Waking up each morning and seeing share prices of businesses moving 4-5% a day is a day trader’s dream but an investor’s nightmare. But this is the market we have at the moment: up one day, down the next.

Long-term investors should stay the course

For those invested for the correct time frame for equities – not less than three years, ideally more – the only way to handle these volatile conditions is to remain calm in the conviction of your decisions about the businesses you invested in. As illustrated in last month’s blog, Facebook (Meta) is now down a whopping 72% since the start of the year. Is this business just over a quarter of the business it was on January 1st? I doubt it but you can buy it for a quarter of the price.

At one point one of the big five whose market capitalization was over a third of the total S&P 500, Facebook has fallen to the 25th largest company on the NYSE. Blue chip stalwarts like Coca Cola, Walmart and Johnson & Johnson have regained their places ahead of Facebook.

The message from all the great investors – Lynch, Buffet, et al. – is that the key to success is to remain invested as long as the fundamentals of the business remain strong.

Invest in the right sectors

Though being invested is important, especially when cash is still losing 6-7% in real terms with current inflation levels, decisions do perhaps need to be thought through a bit more than in times when everything was going up.

Being in the correct sectors is of course vital. Technology has been hardest hit. Valuations were a bit aggressive to be sure, and it would have been the first port of call for those seeking to cash in on profits. But with the sector down 26% on the year, prices are cheap enough to go back in.

Geographical sectors are also important. An exchange traded fund (ETF) in Turkey would have made you over 62% so far this year, Saudi Arabia is up over 20%, Indian markets are also up along with my home country of Thailand.

Of course this is not to suggest that we should all buy into Turkish equities; this is a country whose economy I know very little about. To once again paraphrase the great Peter Lynch: know what you own and know why you own it.

Size matters. Correlated returns that once existed between investments in a certain country have a wider gap now: one example is the UK this year, where ETFs for companies with capitalization above $10 billion USD (“large cap”) are down 4%, whereas medium cap funds are down six times that at 24%.

All this does however illustrate the need to dig a bit deeper to get the returns you may have been used to.

Active v Passive

It also calls into question the old active versus passive argument. Over time, when volatility is low, the passive camp often comes out on top. Many would advocate buying an S&P ETF with low fees that over time will outperform active management.

However, in times of volatility it is usually the active managers who are better positioned to achieve growth. They can hold cash, identify sector and geographical opportunities instead of just being carried along with the market as a whole.

For all those firmly in the passive camp, there is also an active passive option. ETFs provide the passive aspect, but you can decide which sectors to buy into.

More thought and guile is required in these testing times. Major influences like inflation, interest rate increases, the housing crisis are still very much a part of the challenges we may face over the coming months. There is still profit to be had, you just need to know where to find it.