What on earth is happening to markets right now? Cast your mind back just one year and the world seemed a pretty positive place.
The ‘great re-opening’ was in full swing, as people rushed out to buy and experience the things that they had been prevented from doing during two years of the Pandemic.
Friendly central bankers just kept on throwing money into the economy, ‘experts’ told everyone that inflation was only ‘transitory’ and that Russian chap was just ‘sabre rattling’.
Twelve months on, we are faced with some pretty massive challenges and (if the media are to be believed) we are all doomed!
Yesterday, the final big US Equity market went into ‘Bear Market’ territory – dropping more than 20% from its last high point in January. This was caused by US Investors ‘capitulating’ to the constant bad news. There have now been three downward ‘legs’ or ‘crashes’ in 2022 on US Equity Markets.
Overwhelmingly, the biggest cause of these crashes has been the US Central Bank (FED) lifting interest rates and squeezing off the money supply to the economy.
This has massively hurt the US export market, as an ever strengthening US Dollar makes US manufactured goods increasingly unattractive to global investors. It also threatens to dramatically increase mortgage defaults as US homeowners wrestle with rapidly rising mortgage rates.
Yet the FED will keep going until either inflation drops, or until the wheels come off the US economy…..or until US politicians tell them to stop.
With the big ‘Mid Term Elections’ coming up in November, I just wonder if the latter may have more influence than the former.
In the UK, we have seen a truly remarkable and unnerving 48 hours. On Friday, the Chancellor came out with some brave and radical tax cuts to try and ‘reboot’ the UK economy and stave off stagnant economic growth. This was not backed up by the Office of Budget Responsibility and was not ‘telegraphed’ into the media beforehand to test market reaction. The Chancellor then stated that more tax cuts were coming on Sunday. This was the final straw for Bond markets.
The UK Government need Bond markets to lend them the money that is required to fund the tax cuts. I recently heard a statement from a well-known fund manager that every 1% rise in Gilt yields represents an additional £26 billion per year of UK interest repayments for the Government to find. That’s roughly the equivalent to 40 new hospitals! Gilt yields started this year well under 1%, they are now bouncing around the 4% mark.
The rise in interest alone that the Government is having to pay is eye watering.
Part of this yield rise is down to the Bank of England and part of it is down to a lack of confidence in the management of the UK finances. Whoever is to blame, the BOE Governor and UK Chancellor need to work harder than ever to reverse this image and situation as fast as possible.
So what is this all doing to our treasured client portfolios?
Well the simple answer is that (despite all of our best efforts) the portfolios have fallen this year. This is highly frustrating and we know only too well how upsetting it can be to see your bottom line trailing for nine months.
The question that I am frequently receiving is ‘are we at the bottom yet?’
I have always said that there are two types of market forecasters – ‘those who don’t know and those who don’t know they don’t know!’
Honestly, I can’t say if we are ‘at the bottom’ yet. What I can say with real confidence, is that markets look very good value right now. This is particularly noticeable in Bond markets where the ever increasing yields are making normally boring Bonds look like a better bet than Equities.
This topsy turvy scenario is not necessarily all bad news. It presents us with a real buying opportunity. It also means that clients with lower risk portfolios will receive higher incomes that can be reinvested back into their portfolios to replenish previous losses over time.
And ‘Time’ is really my mantra of the day. It is so crucial to remember that we invest over the longer term. If I were to purchase a block of flats with my money and then started to receive my rental income, only to be told by an Estate Agent that the individual flats had temporarily fallen in value by 20%; would I suddenly feel that I needed to rush out and sell them?
No, that would be madness! In that scenario, it is obvious that I would hang on to my flats, continue to enjoy the income and wait for the market to change in my favour. So it is with investment portfolios.
Income is a critical part of our investment planning for our clients. Reinvested dividends and interest can have a positive long term effect on portfolio values – even in dropping or long term flat markets.
I still am waiting for the big bounce back! However, it never hurts to have a ‘Plan B’ in terms of reinvesting ever increasing income yields.
I want to reassure you today of three things:
Firstly, the drops over this year for our portfolios to date have not been as dramatic as previous crashes. This means that our clients are actually in a better position when recovery comes.
Secondly, recovery will come, we just don’t know when. However, a slowing of interest rate hikes or an end to the war in Ukraine would likely trigger such a recovery.
Thirdly, we have been through these market troughs and low periods on multiple occasions in the past. We are here for you so please don’t suffer in silence. History is sometimes the greatest comforter when it comes to markets – don’t let the media get to you. They just want you to stay tuned in to their message.
We are here for you 100%. Please let us know if you need anything or any further reassurance. My very best wishes indeed.