“To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”
Sir John Templeton
Whilst the much-expected “excitement” finally arrived to markets, it was not the kind most investors would call “fun”. The signs had all been pointing to a downturn: the Crypto bubble was nearing its bursting point. The continuous rise in housing prices and certain stocks was unsustainable. And bond yields were long-overdue for an increase after decades of decline. With so many economic cross-currents at the moment, calling the current outlook “murky” would be an understatement. Investors are still fluctuating between gambling on inflation and recession like lovesick teenagers … Since the financial industry is not much better at forecasting than a daisy is at predicting true love, we should shift our focus. Rather than predicting the future, we should figure out the definites and identify productive courses of action.
Every bear market is followed by a bull market, without exception. We never know how long it will last, but we can make an educated guess. I believe this one will be longer than the covid downturn, because governments and central banks cannot flood the economies with free money this time. That free money is, after all, the main reason for the inflation we are seeing now. However, this recession/slowdown is caused by the central banks, which means they can back off when the timing is right. Don’t get me wrong – I’m not talking about rate cuts! That would prove that they are no better at steering economies than drunken sailors (no offence intended to drunks or sailors). But the tightening cycle could pause earlier than expected, which would bring us some relief. I expect this recession to be shallow and short-lived; we may be able to get on with the economic recovery later in the year.
For a well-prepared investor, a bear market is an opportunity, as they don’t come along too often. Historically, the market has spent more years in a bull market than a bear market. Whilst no one can consistently predict the duration or magnitude of bear markets at the company level, a good investment manager should be able to pick up some bargains for the not too distant future. But don’t pick up high-flying stocks just because they are cheaper. Instead, pay attention to fundamental financial metrics and understand the business you are investing in. It is highly unlikely that you will get the bottom price for most stocks, so you have to be prepared for some short-term pain. However, the rewards on the other side will be significant. Often, the only reason stocks fall is because people are selling, which convinces others to sell. Essentially, you need to invest like a psychopath! That’s not to say that you should be morally depraved, of course, but when it comes to investing, you must stay unemotional and have blatant disregard for what others think.
Most of the declines (or at least 75% of them) in equity indices have already occurred. As economic growth stays resilient and actually picks up, moderating inflation, less hawkish central banks and consumers (who are nervous but still in fairly good shape) will narrow the losses at the index levels. On a global basis, housing is likely to remain challenged, especially outside of the USA, where prices have not adjusted yet. The combination of higher rates and overvaluation will probably lead to a correction of 20% or so, but not a 2008 scenario. 2023 is the year we enter a new bull market, making up all the losses and seeing some gains as well. Investors are likely to be wary, so it might take time for things to heat up. 2023 is also an uneven year – haven’t you noticed the recent trend? 2017 great, 2018 challenging, 2019 great, 2020 challenging, 2021 great, 2022 – well you know …
“Investors are still fluctuating between gambling on inflation and recession like lovesick teenagers.”
Peter Ahluwalia
Your Wealth at a Glance.
