by James Thompson
I read a headline yesterday derived from a hitherto-unknown (to me) ‘American investor’ called Jim Rogers. The headline read “Bear Market in stocks to be “worst in my lifetime””.
I should note that firstly I was intrigued my Jim’s tenure on this planet and wanted to check he wasn’t under 2 years old. Alas, Jim appears to be a chap with some considerable experience and will no doubt have invested through a slide or two.
It is hard to argue with Jim’s rationale that although the current slide is nowhere near the worst of a lifetime (more on this later), he does see a lot of pessimism in the world right now (we’re agreed there, Jim).
Jim is of the expectation that this will be “even worse than what we saw in 2008”, which is a bold claim.
The sceptic in me is reminded that competition for attention in online content is fierce and negative, ‘shock’ content spreads faster than positive! A broken clock is correct twice a day and only time will tell.
Let’s try to look at the numbers involved here with some objectivity.
Jim is referring to the stock market, so the equity portion of a portfolio. Of course, our portfolios are heavily diversified across many asset classes, sectors, geographies and styles. The vast majority of our investors have much greater degrees of diversification and will not be subject to these levels of decline, but will be affected to a greater or lesser degree depending on their chosen risk/return profile.
Jim’s sweeping statement is not alluded to any particular geography or sector, so let’s consider a basket of equities, diversified across the UK and Global Equity markets, as a good proxy for Jim’s prediction.
If we consider the Becketts Aggressive managed profile, it currently has an exposure of 96.3% to a managed profile of UK, global and sector diversified equities.
This profile has generated a 5-year return to date of circa 27.0% but has not been immune to the downward pressure since mid-November 2021, reducing in value by 23.0% from peak (15th November 2021) to the current trough (as at writing 20th June 2022).
For the purposes of historical comparison, we have selected an equity–based portfolio, comprised similarly of UK and global equities, tracked by index.
Let’s look at the previous corrections, largest first:
- Between Dec 1972 – Sept 1974, this equity-based portfolio devalued by 8%
- Between Aug 2000 – Jan 2003, this equity-based portfolio devalued by 9%
- Between Oct 2007 – Feb 2009, this equity-based portfolio devalued by 4%
- Between Sept 1987 – Nov 1987, this equity-based portfolio devalued by 9%
- Between Dec 1989 – Sept 1990, this equity-based portfolio devalued by 2%
- Between Dec 2019 – Mar 2020, this equity-based portfolio devalued by 6%
As we can see, the current correction (at 23.0% for virtually 100.0% equity-based investing) is now ‘on the list’ in the top 6 corrections over the past 52 years and we understand and recognise the severity of the reversal.
Of course, each of these events is unique in its background and driving forces.
We expect the recovery pattern to be different too but importantly, we have no doubt at all that a recovery (and subsequent growth thereafter) will take place in due course.
What is hard to tell is how long that may take? Each one of these serious events was followed by a recovery and growth to record market highs. What does history tell us about these recoveries?
BIG CAVEAT REMINDER TIME – it should be remembered that past performance is not necessarily a reliable indicator of the future!
Firstly, we are sceptical that the current set of events will lead to a slide equivalent to the worst in Jim’s lifetime. Of course, any number of unknown threats and headwinds could transpire to bring this about but based on status quo, this would not be our expectation.
During times such as these it is perfectly natural and normal to focus on negative factors and to feel as though the correction does not have end in sight. To be fair to Jim, he does go on to advise that from his experience the way through these times is to shun TV and a multitude of advice.
The best advice he says is invest in what you know best about, which is also a central tenet of the Becketts Investment Committee.
In recent times, it has taken co-ordinated policymakers’ response to spark the recovery. Think low interest rates, QE and banking sector support in 2009. Think Mario Draghi ‘do whatever it takes’ during the Eurozone crisis of 2012 and furlough, looser monetary policy and vaccination development during the COVID-19 crisis in 2020.
Unforeseen catalysts to recovery can and do transpire. It is not in the majority’s interest to have capital markets producing negative returns and general innovation and strive for success (both financially and environmentally) has won out in the past and we expect this to continue.
Of the 5 corrections above, all at a greater degree than that we are currently experiencing, the tenure of the slide varied between 2 – 29 months, which unfortunately does not provide a reliable indicator for how long the current malaise may last. The average period of correction for these events was 15 months.
All 5 of these corrections recovered and the tenure of the recovery varied between 9 – 35 months, again, no reliable indicator can necessarily be drawn here. The average period of recovery was 17 months.
As Dominic alluded to in his own response last week, we take comfort that this type of market is planned for and accounted for in our planning-led services. We remain available at all times and will continue to be proactive in our contact. If you feel an additional meeting, conversation or need for reassurance please do not hesitate to contact us.
