By Rebecca Ellis
SAT, 08 OCT, 2022-theGBJournal| Good riddance to September: with this bloodbath of a market no one would blame you for feeling a sense of hopelessness as we head into the final quarter of the year.
Closing out the week, the S&P 500 was tracking for about a 9% decline in September and slightly greater than 5% for the third quarter. The Nasdaq lost about 10.5% over the past month. Both indices are on pace to lock in their worst September since 2008. September is historically the worst month of the year for the market.
While the outlook the economy remains bleak, we are not in a financial and market crisis like 2008 or a dot-com bubble-type crash that lasted from March 2000 to October 2002. The drivers of the price action in stocks heading into October remain largely unchanged.
Inflation and the Fed
As a result of inflation, we are seeing a swift reversal of the easy money policies — low interest rates and quantitative easing — that helped support risk assets for over a decade and most recently during the dark days of the pandemic. The Federal Reserve is seeking to suck money out of the system and put power back in the hands of employers to cut wage inflation, while Washington has introduced several more simulative initiatives that would increase the amount of money in the system and add jobs.
Additionally, the Fed’s tightening cycle, which began with a small interest rate hike in March, has only accelerated into the fall. This is leading to demand for dollars and causing the U.S. greenback to strengthen relative to other currencies. The result has been a stiff headwind for companies selling into international markets as U.S. goods become more expensive to foreign buyers.
China’s Covid policy
Uncertainty around China’s reopening from the pandemic continues to weigh on the global stock markets because East Asia represents a significant growth opportunity for many companies. In addition, political tensions between the U.S. and China over several issues, including Taiwan, are leading to a reversal of the globalist agenda that helped keep inflation down — with many politicians now calling for jobs to be brought back to the home region. How far this reversal goes remains to be seen.
Supply chains are being reorganized and some jobs will make their way back to the home region, especially those tied to industries considered to be a matter of national security. Other jobs may end up in emerging market countries. Apple, for example, has begun shifting some production to India.
Russia’s war in Ukraine
Finally, there is Russia’s unjustified war in Ukraine, which in addition to being a humanitarian crisis, is proving to be a European nightmare. It is disrupting energy supply chains to the entire region. Of course, the energy market is global — and as a result, everyone is feeling the impact of this war at the pump which is contributing to global inflation. This is threatening a global recession.
What is the answer?
Should we just take our ball and go home? History would say we stay the course and stick to our discipline. As brutal as this market may be, it is important to zoom out and acknowledge that over the long term, the reason equities have historically provided the best returns of any asset class is because investors are ultimately rewarded for taking on the risk you experience in a year like this.
Can things get worse from here? Sure. Even if we do go a bit lower, we would still be well within the parameters of an average bear market. The absolute carnage we have witnessed at the individual stock level is providing some of the best opportunities we have seen in years for those who can stomach further volatility and stay the course. Whether we pick up accidental high yielders for some passive income or focus on tech stocks conducting buybacks while trading at some of the lowest valuations in years, we think there are plenty of opportunities out there right now.
Equity markets are technically oversold, and we may well see another bear-market rally coming up soon. We now see more of a consensus that inflation figures are likely to drop as economic activity slows substantially across the world. This should finally provide some support for equities. The USD remains a safe haven currency while Europe is heading for a severe recession.
The new UK government is challenging the laws of gravity of financial markets almost unhinging the UK pension system in the process. Cash is a safe position to hold while some short-term USD Treasury bills at yields north of 4% start to look attractive to bridge short-term volatility. Taking a long-term view, stocks are valued at the same level as before the Covid pandemic started in 2020. Still, volatility will remain high, and patience is a good guide.
Rebecca Ellis is a Personal investment advisor, based in Zurich| rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com
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