Market Commentary December 2022

Most investors will be happy to see the back of 2022. It has been a year where everything went against both the stock and bond markets. Much of the pain was self-inflicted – as too much liquidity led to out-of-control inflation and then central banks were far behind the curve (and have been playing catch up ever since). Too much liquidity led to bubbles in the mega-caps in 2021 and mega bubbles in tech stocks, most of which had scorching revenue growth but were not profitable. Some of these names went up 200%, 300%, and 400% – performance reminiscent of the late 1990s tech bubble. The biggest bubble was in crypto, as a generation of “20 somethings” took the financial world by storm, sending Bitcoin to $69,000 in late 2021 from $4,000 in early 2020 and then back to ~$17,000 today. All bubbles eventually pop – and then things get very ugly, as they have this year. We project that 2023 will not be nearly as  dramatic, as so much bad news has already been reflected in stock and bond prices.

Market Commentary November 2022

This year is turning into one of the worst for the S&P 500. The year-to-date return excluding dividends is an abysmal -21%. Over the past 30 years, this loss was exceeded only in 2008, when the “500” collapsed 39% during the financial crisis, and 2002 when it declined 23%. Previously, the worst years for the S&P 500 were in 1974 (-30%), 1937 (-39%), 1931 (-47%), and in 1930 (-29%). Going back to 1929, there are only a few times when the index got walloped in consecutive years. Those include the bear markets of 1929 to 1932, 1939 to 1941, 1973 to 1974, and 2000 to 2002. Multiple years of gains are much more common, which makes sense because the market rises approximately seven out of 10 years. What is unusual about this bear market is that bonds have been in their own bear market, leaving investors with no place to hide, with the 20+ Year Treasury Bond index falling 35%.

Market Commentary October 2022

A new month, a new quarter, good riddance to the old. It’s been rough of late, with all asset classes falling hard and fast. There are many market conditions that investors need to evaluate: inflation, interest rates, dollar strength, global monetary policies, geopolitics, bond-yield inversions, rising volatility, and corporate earnings. Still, central banks have been clear: the focus needs to be on inflation, inflation, and inflation. That suggests investors are being forced to prioritise how the overall economy is holding up against steady and large interest-rate hikes. The Fed believes that its harsh medicine will work, but not instantaneously. It expects inflation to grow in the US by 5.4% in 2022, 2.8% in 2023, and 2.3% in 2024, finally reaching its target of 2.0% in 2025. So much for transitory but at least 2023 is looking much brighter.

Market Commentary September 2022

The Technology sector has meaningfully outperformed the broader market in recent years. The COVID-19 pandemic in particular drove a major demand spike in edge devices (PCs and smartphones) and other products for the connected home. 2022 has been a different story for investors. The supply-chain crisis was focused in electronic parts and there has been a decline in consumer edge-device demand as inflation sapped household buying power. Rising interest rates have also hit valuations. Yet the sector is also benefiting from cyclical, demographic, and secular drivers. The hybrid workplace is here to stay, and the PC has recaptured its once-preeminent place in the technology ecosystem. From a demographic perspective, up to two billion people worldwide are joining the middle class and prioritising real-time connectivity. Multiple secular drivers, including cloud, AI, automation, electronic vehicles & autonomous driving are expanding technology demand into non-traditional markets. Our recommended investment to tap into this theme is the Polar Capital Technology Trust (PCT.L), an investment trust listed on the LSE with a phenomenal track record (+495% over the last 10 years).

Market Commentary August 2022

After experiencing its worst first-half decline since 1970, the S&P 500 jumped 9.2% in July. Impressive yet depressing at the same time considering how much further it has to go just to get back to breakeven. If you are wondering why stocks rallied, you might conclude that something positive must have happened on the inflation front. Actually, the inflation data reported in mid-July was the worst in 40-plus years. Ditto any positive thought on the economy; Q2 GDP reported late in July was negative, meaning the economy had met the textbook definition of a recession. The market’s ability to shake off the data and finish the month in rally mode likely reflected a few factors. For one, the sky does not appear to be falling on the consumer economy. Lower-income consumers are struggling with reduced purchasing power, but most consumers are benefiting from full employment and rising wages. Equally important, the markets are starting to believe that the Fed’s aggressive action will help contain inflation. Finally, consumers may be learning to live with higher interest rates – particularly if, as some investors now suspect, rates hit a plateau and begin to fall next year.

Market Commentary July 2022

The S&P 500 has rebounded over 4% from its 2022 lows. But from a technical perspective, it is far too early to call the bottom. For this we need to see a huge improvement in the percentage of stocks trading above their 200-day averages. Unfortunately for investors seeking to call the bottom, that takes time. Price tends to run away from investors at a bottom, and often you will hear investors say that they will wait for the next pullback that never comes. The market does not let you in but rather just locks the door. News flow at the bottom tends to be terrible and those waiting for the all-clear sign on headlines will likely be disappointed as the market discounts better news in the future. Bad news is bought, which can be confusing to many – especially those that have not been through numerous bull/bear cycles. Generally, stock market lows are found when some type of bottom formation is seen, and the bullish breakout coincides with the break of the bear-market trendline. Quite simply, it’s a succession of higher highs and higher lows.

Market Commentary June 2022

After two years cooped up in their homes, consumers have been anxious to get back out and enjoy the travel and services they have been missing. In anticipation of a guest surge, airlines have added routes and flights, hotels have ramped up promotional packages, and restaurants have revitalised their menus for consumers anxious to put aside the home cooking. In a fully employed economy with rising wages, and with savings supplemented by past stimulus and reduced commuting costs, consumers should be more than ready to make up for missed time. But an unwelcome traveller, namely inflation, has booked passage. Many consumers are devoting much of their disposable income to food, fuel, and shelter, leaving scarce resources for discretionary goods and services such as travel and leisure.

Market Commentary May 2022

April was a brutal month for the stock market, with blue-chips suffering their worst month since March 2020, while the Nasdaq had its worst month since October 2008 when the ‘great recession’ was taking hold. Purely from an investment perspective, the drop has had the benefit of washing away significant portions of the over-valuation in stocks that existed at year-end. Indeed, the combination of continued earnings strength and a correcting market have helped ease concerns about stock-market valuations. At some point, bulls will wade back into the carnage in search of favourable entry points for stocks that investors loved when they were pricey and hate now that they are cheap.

Market Commentary April 2022

Investors study the yield curve for signs of pending economic softness; a key indicator is when short-term rates push above longer-term rates. That does not normally happen, given that investors expect to be paid a higher rate of return for committing money for a longer period. When rates push higher at the short end, that suggests that the long-term outlook is poor. Investors looking for recession indicators typically focus on the relation between yields on the two-year and 10-year Treasury notes, called the “two-10s spread.” This recently inverted. The last dozen times the two-10s spread inverted, the US subsequently experienced some degree of economic slowing, several times resulting in a recession.

Market Commentary March 2022

With stock markets already on edge, thanks to ongoing inflationary pressures and the impact of rising interest rates, the war in Ukraine has sent the markets into freefall. Running away at the first sign of difficult times, however, is not a good move. Shares have historically delivered a better return than cash in the bank and they tend to recover quickly during times of turmoil. Even though remaining invested can be uncomfortable, it’s important for investors to hold their nerve and wait out the market volatility. Just ask those who sat tight through the Covid sell-off in February 2020, global financial crisis in 2008, and countless other black swan events. Investing is all about patience and eventually the rewards will come.