Given the volatility and economic uncertainty investors have experienced this year, we think it makes sense to review the state of markets, expectations, the economy, and most importantly, take a constructive view of how investors should be positioned to navigate this.
Global markets continue to be volatile. Bonds as an asset class have had their worst first 9 months to a year in history. At the same time equity markets have seen significant declines. The S&P 500 Index is down 23.5% YTD in 2022, which is close to where the market was in February of 2020, just before the pandemic-led sell-off. Adjusting for inflation (remember inflation reduces the real value of assets), and the S&P 500 is down closer to 34% so far in 2022 and is below 2020 levels.
Meanwhile inflation continues to surprise to the upside. Last week US core inflation again increased over the previous month, raising the prospect of yet more interest rate rises needed to curb inflation in the world’s largest economy. The ongoing real estate crisis and relentless zero-covid policies in China are weighing heavily on the world’s second biggest economy. Europe faces a tough winter ahead with record high energy prices and an economy already likely to be in recession.
Is there any good news here?
Well, yes, there are a couple of important factors that are easy to miss, but critical for investors to remember.
First, investors are often guilty of spending too much time looking backwards, i.e., focussing on recent past performance, recent negative news, while spending too little time looking forwards. It’s easy to understand why. Looking backwards is easier, it is known information, we know what happened in the past. Looking forwards is hard, and can be scary. The future is unknown and uncertain.
Looking forward and with a long-term investing mind-set, we can say with some certainty that inflation in the US will subside (eventually), China will re-open (eventually), and Europe is already shifting away from a reliance on Russia gas supplies towards a more diversified energy mix, and as such energy costs will come down (eventually).
Investors must be careful not to get trapped in the news stories of the moment, and remain focussed on the future, which offers great investment opportunities, especially so in structural trends in the economy. These trends are not going to be stopped by short-term factors, like inflation, pandemics, or even wars. The rise of the global middle classes in emerging markets, adoption of new technologies in healthcare, artificial intelligence, cloud computing. These are just a few examples of the incredible investment opportunities for long-term minded investors and as such should not be avoided now because of short-term concerns.
Second, as already mentioned, markets have come down a lot so far this year. Adjusting for inflation, the Nasdaq Index is down 43% in 2022! That is a major correction in prices. As painful as that is to swallow for investors with exposure to the market, it also means we are much closer to the end of the price correction than the beginning. It also means many of the stocks that offer exposure to those aforementioned long-term structural growth trends are now trading at much lower prices vs. 1-year ago. In many cases they are trading on their lowest prices ever!
To quote the ‘Sage of Omaha’, Warren Buffett, “be greedy when others are fearful.”
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