Will there an ever be an end to this Economic Gloom?
Right now, it feels as if Global Stock markets will never see recovery again.
The Geo-Political landscape is frankly a basket case, with Middle Eastern tensions flaring at exactly the same time as a Cold War has reignited between Communist and Democratic states. You would be forgiven for buying up all the beans and toilet rolls in Tesco and hiding under your bed!
Since the end of 2021, all investment portfolios have really experienced similar challenges, as Bond Markets crashed simultaneously to Equity Markets.
You can take your pick as to the contributors to this – Pandemic, Supply Chains, Russia’s Invasion of Ukraine, Politicians, Migration, Central Banks, China/ America trade wars…..frankly the list is exhausting.
The net effect of the past few years’ challenges, has been that Bond Markets are utterly on their knees. This is really bad for more cautious portfolios – and for the entire financial system.
Bond’s such as UK Gilts and US Treasuries need interest rates to stay consistent or fall. Nobody really expected a scenario where Central Banks would crank interest rates up at such a terrifying speed that they virtually broke the very system they are entrusted to protect.
In sympathy with this, Global Equities (really with the exception of Oil and Arms stocks) have also crashed downwards. The recent developments in Israel are now putting more upward pressure on Oil again – as well as putting downward pressure on Equities.
It’s like one big ‘Perma-Crisis’ – and it’s never happened before right?
Well, actually, it kind of has.
In 1969, the Global Economy was on the back of a boom period and running out of steam fast. Cold War escalation between the Soviet Union and the West, coupled with a terrifying Middle Eastern conflict – all pushed Oil prices through the roof.
This meant that Central Banks such as the FED had to deal with rampant inflation. Faced with the prospect of an overheated inflation bubble – they cranked up the interest rates – hard.
The knock on effect of this was virtually identical to today.
Bond Markets crashed down and the US S&P 500 Equity Index lost 34% from 1969 to the end of 1970 – as the US plunged into recession.
Here’s the eerily similar bit though. This recession was so well telegraphed that the markets fell – way in advance of the actual recession.
So as the US went into recession at the end of 1969, the S&P 500 had already lost 20% from its peak.
Today, the S&P 500 is sitting around 20% down from its peak.
I have attended several webinars and seminars over the past month, as well as exchanging multiple phone calls with our fund house contacts and every single one of them says the same – recession is coming. They fully expect to see the US enter recession in the early part of 2024 – with Europe and the UK following shortly after.
So what happened once recession commenced in 1969?
Well, inflation softened considerably (although it still sat under the surface). The FED started to loosen monetary policy again to try and ‘re-boot’ the US economy – by dropping rates again, and the Bond Market returned to normality.
The S&P 500 in 1969 did continue to lose ground and unemployment more than doubled in the US over that year. This completed the S&P 500 crash down to 34% from its peak.
However, within a year, the recession had ended as rates and inflation normalised. By late 1970, the US economy was bouncing back and the S&P 500 then experienced a (wait for it….) 73.5% gain over the next few years!
Whilst past events don’t always repeat themselves, the incredible similarities between 1969 and 2023 should not be overlooked.
Of course, Central Banks might behave differently this time around creating a less favourable bounce. Or a unique set of circumstances could mean that we are already at the bottom of this crash.
My point; is that history is jam-packed with instances where the investors of the day faced incredible challenges and often a plethora of negative economic headwinds.
However, the winners were always those who held their nerve, remembered the long term game and took heart from previous instances when crashes turned to recovery.
This has been a long one folks and (in total honesty) I think it is now likely to get a bit tougher before it gets better.
But! I am very encouraged by the underlying fundamentals of many stocks within your Portfolios now. They are priced incredibly cheaply and this will eventually lead to very pleasing returns.
For now, it’s a game of patience.
I really appreciate how worrying the world is currently.
It’s at times like these, I find myself incredibly thankful to be living where we do. There are many things I count my blessings for such as my faith, family and friends – and recent events do create some healthy perspective.
However, if you are at all worried about your Portfolio or Financial Plan – don’t be a stranger! Call us! We are here for you all the way – and history teaches us that we will celebrate better years together in due course – of this I am certain.
My very best wishes as ever. Darren