Let’s be honest, the past few years have been utterly exhausting for investors.
Following the Post Pandemic Bounce; we entered a ‘Bear’ market in November 2021. Investor sentiment soured around the world as it seemed inevitable that central banks would have to push up interest rates.
Rising interest rates hurt stock markets, as they have the effect of ‘squeezing’ the money supply.
18 months on, we have seen the worlds’ second largest energy supplier invade one of the worlds’ largest grain suppliers, rampant inflation and central banks wielding the crude tool of interest rate rises at a frightening rate.
All of this has led to investors experiencing losses over the past two years.
Interestingly, they are now experiencing very small gains over the past twelve months and they are in positive territory over more than three years. The golden rule of investing for over five years is still crucial and stands the test of time.
However, you would be forgiven right now for feeling somewhat underwhelmed by your portfolio performance even over the golden rule period.
As an example, we can look at our Mainstream Level Three portfolio which sits very much in the middle of our clients’ risk range. This model has grown by around 17% over the past 4-5 years according to independent U Scan reports. This equates to around 4% per year over four years.
But let’s just review where we currently stand – and see if we can draw any comfort from historical similarities.
The US Nasdaq index that contains all the big global companies such as Amazon, Apple and Microsoft is still down around 20% from that November 2021 peak.
The war in Ukraine is still not resolved and inflation is still very high.
In addition to this, we now find ourselves confronted with a ‘Mexican standoff’ between the Democrats and Republicans in the US. The row this time is about the so called ‘Debt Ceiling’.
My (very brief) potted explanation is this: The Democrats have been on a spending mission in the states, much of this for very admirable social assistance. They have funded food and medical aid packages from national debt. The Republicans are frustrated by the huge amount of national debt and so are now refusing to agree an increase in the amount the Democrat led US Government can borrow going forward.
Initially, the Democrats thought that the Republicans would fail to gain any momentum with their objection – as the Republican party is already bitterly divided through infighting. President Biden’s strategy was to let things calm down and hopefully get a deal quietly. This would then position him as a good leader in the eyes of the American electorate.
This all backfired last week when it became clear that the Republicans were prepared to set aside their differences and to dig their heels in over negotiations. This has forced Mr Biden to race back from an important Asian tour – to try and resolve the standoff.
The US Treasury department has stated that ‘the money could run out’ as soon as the 1st of June. This has somewhat focussed minds. The trouble is that the Republicans stand to gain through embarrassing the Democrat President. The closer to the edge that negotiations run – the poorer the President appears in terms of leadership.
This is cliff-edge stuff. If the debt ceiling is not lifted by the 1st of June, there is the chance that the US government cannot pay state workers or possibly even the interest on their own debt. This sends shivers down the spine and begs the question – ‘has something as crazy as this ever happened before?’
I like to keep every review that I have ever carried out. This weekend, I had some enjoyable reading, going back over our 2012 Proactive reviews.
At the time, the world was trying to get back on its feet after the Great Financial Crisis. Countries like Greece were in a heck of a financial mess. Then the Republicans decided to block President Obama’s debt ceiling increase…..
This led to a very difficult year, and I remember some of our clients feeling a little underwhelmed by their portfolios.
In the June of 2012, we reported a four-year growth number of just 9.57% for our Level Three model (or just over 2% per year). Things were looking a bit sad and fear was running high. Indeed, the VIX fear index was much higher than today.
We reassured our clients (some of you may remember it!) and we held our nerve.
By the next Proactive review in the September of 2012, the four year return had shot up to around 22.96% (or well over 5% per year).
The following Proactive review in the December of 2012 saw the Level Three model now reporting four year gains of 58.89% (or well over 14% per year).
My point is this. Whilst we can’t expect exactly the same thing to happen again, we do know that markets shrug off what seems like impossible challenges. Markets are not rational like you and I! They are led by peoples’ behaviours.
To this end, I wanted to get this short article out to all of our treasured clients today – to warn you all that I see the US debt ceiling as a real challenge in the next coming week or so. I also think it is highly unlikely that the Democrats and Republicans suddenly come to a deal in the coming days. If history is anything to go by – they will push each other to the wire. This could well temporarily damage markets and portfolios.
However, the underlying recovery story for our clients’ portfolios is strong. We have been watching much steadier markets over the past couple of months and interest rate ‘hikes’ now look to be nearing an end.
All of this encourages me. I personally feel that there is a real opportunity in markets right now for both Equity and Bond investors from the highest risk strategy – all the way to the lowest risk strategy.
We are working hard on our Proactive reviews this week, and we shall have the reviews out around the 1st of June. However, I felt that we couldn’t wait that long to just explain what is currently going on.
I hope that this helps. I shall be back in touch in just over a weeks’ time. Meanwhile, if you have any concerns at all – please don’t hesitate to contact us. We are here for you 100% and we have a positive outlook on the future for your portfolios.
We also have some exciting news to follow soon about our planned ‘Good News Matserclass’ this year on the 6th of July so watch out for our announcement!