First Half of 2022
As we pass the mid-point of the calendar year how would we sum up markets? The following headlines from the Financial Times over recent months do a fairly good job of that:
- “US stocks suffer a sharpest first-half drop in more than 50 years” (S&P 500 was down over 20% in USD terms)
- “Central bank chiefs call an end to an era of low-interest rate and moderate inflation”
- “Ukraine war is devastating lives, dragging down growth and pushing up inflation” quote from Kristalina Georgieva who is the International Monetary Fund chief.
- “OECD calls for burden-sharing to counter gloomy economic outlook” (OECD cut growth projections for the world to 3% for 2022 – 6 months earlier they were projecting growth of 4.5% for 2022)
It has undoubtedly been a difficult six months for investors, with most investors suffering losses as both equities and bonds fell in value.
June – Big Month for Central Bank Meetings
June proved a big month for central bankers as they fought to show their resolve to get on top of rising inflation, which hit another record high of 8.6% in June for the Euro area …. following the previous high of 8.1% in May.
The Fed raised rates by 0.75% and US Fed Chair, Jay Powell indicated that the Fed’s commitment to restoring price stability was “unconditional”.
Christine Lagarde, president of the ECB – signalled a 0.25% increase in rates is coming in July but that a higher increase of 0.5% was likely on the cards for September. Just a few days after their June monetary policy meeting the ECB had to call an emergency meeting to address the growing gap in what it was costing Italy to borrow versus Germany (the extra cost was approaching 2.5%). That emergency meeting promised to speed up work on a new “anti-fragmentation instrument”, which eased market concerns over fragmentation of the eurozone, but not over inflation or growth.
Meanwhile Andrew Bailey, the Bank of England governor also raised rates in June by 0.25% following a 1% increase the previous month and spoke of the need for “rapid action to curb inflation”
We have high inflation, higher interest rates on the way and slowing economies. A key question for us is how will this impact company earnings? As a fund manager said to me recently, this is a very well flagged slowdown….” we are all waiting for it”. We can expect that good companies are not just sitting on their hands but are planning for it and as such earnings reductions may well be less than in previous corrections. The upcoming Q2 earnings season will be telling as companies give out their future earnings guidance.
In the past month, we have seen some evidence of retail investors capitulating in the face of investment losses. For short-term investors, this is not a market to be in but for our clients who are long-term investors, we wonder how much of the bad news has already been reflected in the price?
On the question of how much of the bad news is already priced into the market, another headline from the Financial Times caught our attention: “Time is ripe to snap up bargains”. This headline is related to a conversation with Howard Marks, the co-founder of a firm called Oaktree Capital. There were a couple of points he made in the interview that resonates with us and the approach we are taking with our clients:
- ….” the idea of waiting for the bottom of the market is a terrible idea”
- ….” assets could well get cheaper than current valuations in which case we will buy more”
While we are cautious in the face of slowing economic growth and high inflation, we don’t believe that panic will serve our clients well at this time. We remain convinced of the benefits of having a good and disciplined investment process and are still looking at market falls as opportunities for many of our clients to buy assets at cheaper price levels. Remember – planning for bad weather doesn’t reduce the chance of it happening but being prepared can greatly reduce your level of discomfort during tough times, and leave you better placed to assess and capitalise on opportunities to recover once the worst does inevitably pass.
John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.