The Black Swan Capital 2022 Market Outlook

When markets increase their volatility – the amounts they move in either direction from day-to-day – as they are doing now, it typically attracts headlines across the media. It’s normal at these times to worry about your money, to make sure you are, and will be, ok.

There are 3 truisms we apply when looking at financial markets:

1. In our decades of experience, one consistent theme is that market movements seem magnified in the moment when they are happening. When the (relative) calm returns, looking back, the market fluctuations seem less intense. Another way of saying this is that we have a recency bias, where we focus on current information, sometimes forgetting what has happened in the past.

2. The second truism is that most investment markets have historically gone up over time, but not in a straight line. Over time, if you chart the performance of global stock markets, for example, you will see they have increased in value over the last 50 years. If you drill down into any one-year period though, you will likely see short term movements, up and down. It is important to remember this when looking at your investments. It is the long-term performance that is most relevant.

As the graph below illustrates, with each market pullback, the market does recover and over a longer term tends to grow. This table, released this week by financial markets researcher, Morningstar, is relatively short term, only going back to around the start of the coronavirus pandemic. There have been several market pull-backs since then with subsequent returns to growth. The current January 2022 dip is expected to be no different.

3. There is no “this time it’s different”. We have heard this in nearly every positive and negative market over the last 30 years. For us, it is a warning sign. When the loudest pundits start exclaiming that “this time it’s different” and that markets will either go up or go down forever, we look to the fundamentals of the investment markets and to the principles of why you are investing. Our advice here is don’t get caught in the hype of markets, or particular assets or sectors. Invest according to your long-term goals and in investments that have sound financial fundamentals.

What is driving the markets now?

Within the context of these above points, it is good to know why the markets are doing what they are doing, and how we are responding.

Inflation: As many of you will have heard us say over the past year, inflation has increased. This is because of the financial stimulus packages – printing of money – embarked on by central banks in the US, the EU, the UK and around the world since 2020. Higher inflation, even off the very low base that it was, is increasing and is pushing interest rates off their very low – and in some cases still negative – positions. Increasing inflation and rising interest rates can slow financial markets as the adjustment occurs. We are seeing an increase in value in government bonds as their yields fall in response to interest rates and inflation pressures.

We believe the biggest risk investors face now is not a stock market crash, it is inflation.

What are we doing about it? We are helping clients across all risk profiles, to ensure they are staying ahead of inflation, we are working with our discretionary partners to have clients’ portfolios actively managed and adapted to the dynamic market and making sure clients’ investments are aligned to their goals.

The stock market: After substantial rallies throughout the last two years, there is a shift in the world’s stock markets away from high-flying tech and growth stocks and back towards value. You may see this reflected in your portfolios as positions are changed to position you for continued growth. It is also one of the reasons we always talk about minimising your concentration risk. Holding too much of your wealth in a small number of assets can leave you at higher risk when we see these market cycles shift. Many tech stocks, in particular, have dropped around 20% in the first month of 2022.

Our position: being diversified is important. Our selected discretionary portfolios have been cycling from growth to value stocks over recent months in expectation of the volatility we are seeing now. We do not believe it is a time to sell growth assets; as share prices drop, they become better value for new and regular investors. Core portfolio holdings by asset class should be maintained, subject to each client’s personal circumstances. If you hold direct stocks check your financial position for concentration risk. Whether you obtain shares in a company from an employer share scheme or by your own investment decisions, holding too much wealth in one or a few stocks can put you at a concentration risk should something happen to that company.

Sabre-rattling: geo-politics also affects investment markets, investor confidence and short-term performance. The current escalation in tensions with Russia and the concern about an invasion of Ukraine is contributing to short term instability in the markets. We believe this to be a short-term impactor on markets.

In summary, we believe we will see continued volatility over the next 4-8 weeks with a return to more stable and growing markets as we enter the northern spring. If your investment objectives are focused on the long term we urge caution against short-term and reactionary adjustments to your portfolio.

If you want to discuss your investments, your goals or have any questions for us, please contact us at info@blackswancapital.eu.