Where to from here? The September 2022 Black Swan Capital market update

In this article we will discuss the markets and our outlook, but first a reminder… to ourselves and you, our readers.

The great challenge for most investors is to manage the conflicts of short duration volatility with long term goals. It is a known reality that there is an inverse relationship between a) how often an asset is price adjusted (think investments daily priced versus residential real estate yearly valued) and b) how frequently one looks at their investment value, and one’s ability to stick to long term investment goals.

What does this mean? It means if you receive price updates every day, you are more likely to react to small market movements.

Is that good or bad? It can be either but is more likely to be negative. It can distract the investor from their long-term goals. By making reactionary moves, they may also find themselves moving away from their plan, missing market recoveries, and potentially not achieving their goals.

We mention this as a useful reminder as we assess what has been happening in global markets this year and where we see it heading next.

2022 – The year so far

This year has been one of volatility. When much of the market was looking to 2022 this time last year, there was hope of a more benign environment following the severe impacts of Covid. Rising inflation and Russia’s invasion of Ukraine at the end of January changed that, pushing global markets into a volatile six months. The first six months of 2022 were recorded as the worst in 50 years for the US stock market, as measured by the S&P500. In contrast, the UK stock market, as measured by the FTSE100, only fell 4.5% in this period. Linking this back to the above contextual point, these are movements in valuation and losses are only realised when one sells an asset. Having said that, tactical portfolio adjustments have been very important over the last nine months and have been a feature of our client’s portfolios, minimising losses and positioning more strongly for the next stage in the market cycle.

We spoke in mid- 2020 that the vital government and central bank spending at that time to support economies, businesses, and families as the Covid pandemic took hold, would likely emerge as higher inflation, or higher taxes, or both, in the coming years. You can watch the video here. This is what we have been seeing this year. Central banks are moving to control inflation by raising interest rates. This is working as the rate of inflation is beginning to slow, however much of inflation has been supply driven- a shortage of goods due to Covid and the Russian war on Ukraine- rather than too much spending by consumers.

As a response to this, we have seen mortgage rates begin to go up and property prices begin to fall. This is likely to continue for the next 12 to 18 months. We may also see a slowing of economies due to the higher interest rates and this is why some people are concerned about recessions.

It has not been all bad news in the economy. On the negative side, stock markets fell, and inflation reached the highest levels in 30 years, while supply channels remained restricted. On the positive side though is that interest rates remain at historically low levels, even after recent increases, unemployment is at the lowest levels since the 1970s, and companies have been reporting strong interim results.

Looking ahead

To quote our Managing Director, Edward Mainwaring-Burton, “There is only one absolute truth in investing: When markets are rising, they will eventually fall; When markets are falling, they will eventually rise. If that ever changes, it’s the end of capitalism.” It is a useful reminder that markets do go up over time, but not in a straight line. Two images illustrate this. The first shows the various market rises and dips in the last 80 years. They show that markets fall more steeply than they rise, but markets rise for longer and in a more sustained manner.

This second graph shows this as a straight line. Market drops always seem less severe in hindsight as markets trend up in the long term. This graph is also useful as it shows that risk equals return in the long term.

Our view for the rest of 2022 and into 2023 is that volatility will continue, whilst geo-political instability remains, and inflation is brought under control. Market drops in the first half of 2022, however, have created attractive investment opportunities.

We will be focusing closely on the slowing of inflation, on the company reporting season in the US in October, energy supply and prices as Europe and North America head towards winter, and the risks of recession in the US and the EU. Latest data suggests there may be a moderate recession in Germany, driven largely by that last point on the escalating costs, and supply instability of energy.

We advise prudence and focusing on your objectives. If you have a timeframe that is short (think 6 to 12 months) capital preservation should be your main objective, which might mean staying out of financial markets.

If your timeframe and objectives are longer term, continuing with your strategy may serve you better than moving in and out of markets. It is not an easy thing to do sometimes and does not always feel natural, but history shows that maintaining the course can lead to better long term results.

We are looking for sustainable returns, aligned to long term objectives and solid financial fundamentals, not speculative opportunities. Smoothing the curve to reduce volatility will help investors in the short and the long term and ultimately help our clients to remain focused on achieving their investment and life goals.

Ask for help

If you would like to discuss your situation, please contact us at info@blackswancapital.eu and we will be happy to speak with you.