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Market update: October

Confused yet? I think right now everyone is confused. There is so much going on hitting us from every angle that it’s hard to get to grips with everything. September started off with undoubtedly two historic events; Boris Johnson being replaced by Liz Truss and the sad passing of HRRH Queen Elizabeth. At the same time, the ongoing cost of living crisis escalated as temperatures started to drop, leaving people scared to flick the heating on for the first time since last winter. Help wasn’t far away with a rather confusing “cap” on energy costs which turned out not to be a cap at all rather an indication of a typical households bill which left people wondering what did typical mean and if they fell into that category. Next up fast came the “mini” budget where two people who were relatively unknown to most of the public delivered a set of jaw dropping measures aimed at bringing growth back to our shores with tax cuts the likes we hadn’t seen since 1995. Of course, this morning, we have now seen a U-turn on the 45p top rate tax cut, as this one was universally unloved and had caused the most shock across the market. Quite a month September turned out to be and I think underlines the fact that we are in extraordinary times. I’ve talked about “the perfect storm” that we are in at the moment before – quite simply, everything is raining down on us, and it can certainly feel like there is nowhere to take cover. Unfortunately, this perfect storm is then whipped up into a frenzy even further, with the media looking for sensational and provocative headlines in order to win over a reader’s opinion.

So, let’s just look at things practically for a moment. Firstly, the facts. Equity market performance YTD has been terrible:

  • FTSE 100 -9%

  • FTSE 250 -28%

  • S&P 500 -25%

  • Eurostoxx 50 -23%

What started with pockets of negative performance has now spread across to every market. And in normal times, when equity markets suffer, bond markets tend to do well. Unfortunately, in another example of extraordinary times, bonds have had one of their worst ever years, and once again, this hasn’t been limited to the UK, but is widespread.

What this means is that for the traditional and well proven path of a typical 60/40 balanced portfolio (60% equities / 40% bonds), 2022 has been the third worst start to the year since records began. That is quite a stat and truly shows us how much of an exceptional situation this is.

Two of the main reasons for the poor equity market performance this year is the ongoing Ukraine conflict and inflation, as I’ve mentioned before. An improvement in one or ideally both would certainly help things. From a conflict perspective, its hard to understand what a resolution or improvement might look like at the moment, but for inflation it’s a bit easier - we need to see a peak and a calming of inflation before things get better. We can’t predict for sure when that might be, but we do know that it will calm eventually.

What about my investments?

As you can see from what I have described above, its hard to imagine any sort of portfolio not to be sitting at a loss right now. Market declines are disconcerting, prompting many investors to reduce their stock holdings, or pull out of the market. So, what should you do ?

  • If you sell your investments and hold cash instead, you are realising a loss. Don’t forget that however many units in a fund or investment you bought 6 months ago, or a year ago, you still hold the same number of units now. So, by selling those units now, you realise a loss, and you move into cash, which guarantees you a further loss of 8-10% per annum in real terms.

  • If your plan is to hold cash and wait for the market to recover before entering again, don’t forget that timing the market in that way is next to impossible. All too often, investors that have sold out during a crisis have locked in losses and possibly missed the rebound. Looking at data going back to 1930, Bank Of America found that if an investor missed the S&P 500′s 10 best days each decade, the total return from 1930 till now would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%. That’s quite some difference and just shows how large the missed opportunity can be for investors who try and get in and out at the right moment.

History shows us that financial markets have always rebounded from market shocks, posting strong long-term gains and considerably outperforming cash. Riding out market declines and benefiting from potential rebounds has always been the better plan. The chart below from FactSet data analytics ( paints this picture well.

The event is at the bottom, the red bar is the max drawdown (biggest negative) for that event, and the red, green and purple bars are the 1-, 5- and 10-year returns after the end of the event. In most cases, the 1-year return after the bear market ends more than compensates for the max drawdown, and in all cases, within 5 years the max drawdown is pretty insignificant.

So as said earlier, we are in a perfect storm at the moment and there is lots going on right now and no shortage of stories for the media to pounce upon and whip things up further into a frenzy. I’m afraid as uncomfortable as this is, until inflation subsides, we are going to continue to see volatility in the markets. It’s time to batten down the hatches and ride this out, waiting for the recovery that will follow. Whilst markets have generally enjoyed a year-end rally, let’s not count on it this year, let us prepare for the worst to hope for a pleasant surprise. Of course, with any negative situation comes an opportunity, and as already discussed, company values and equity markets are a lot lower than they were at the start of the year and so putting money into the markets right now certainly looks attractive if you have capital available that you do not feel will be needed for the next few years.

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